Draghi implies more ECB action in dovish monetary policy statement
06/Nov/2014 • Currency Updates•
The European Central Bank did not quite meet ours and other strategists’ expectations of concrete announcements regarding the expansion of recently announced policies, in particular the TLTRO. There were also no explicit announcements regarding purchases of corporate bonds or sovereign QE. However, in the press conference, President Draghi more than made up for this by stating that the ECB wants to get its balance sheet back up to the maximum levels of 2012 – about €3 trillion, i.e. over €1 trillion above current levels.
Three points stand out from the press conference:
- This unusually explicit target will be hard to achieve using just the measures that have been announced so far.
- The explicit, almost aggressive statements regarding the balance sheet size by President Draghi suggest that he remains firmly in control of the Governing Council and media reports that he was losing his grip against a German-led faction of members were exaggerated. Draghi has now introduced a balance sheet target for the ECB in the statement, and has done so by unanimity.
- He again mentioned explicitly that economic risks were weighted to the downside and that, should these risks materialise, the ECB stands ready to do more.
Draghi was clear to state that the ECB were unanimous in taking unconventional measures if required, with the ECB tasking its staff to be prepared for such measures. He also discussed low inflation in the Eurozone, stating that the measures being put in place would allow inflation to return to target levels of 2%, although this would be a gradual process, with inflation remaining low over the coming few months.
The above leads us to conclude that it is only a matter of time before further easing measures are announced, probably as early as the December meeting. The currency markets seem to have taken the same view, sending the Euro tumbling against all other major currencies in reaction. The Euro fell by 1% against the Dollar immediately after the announcement, while declining by as much as 0.8% against the Pound in a frantic few minutes.
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