That Mario Draghi, he's such a tease. Rarely has there been a central banker who can string along financial markets by talk alone and the president of the European Central Bank was at it again on Thursday.Be patient, Draghi said.
The ECB is worried about low inflation and the strength of the euro and is ready to act. But not quite yet.
Draghi will no doubt be chuckling to himself that the seduction technique again worked a treat. A flash of leg and the strong hint that good things come to those that wait was all it took to stop the euro breaking through the $1.40 level.
Markets are going to be mightily disappointed next month if it emerges that Draghi again declines to do anything. In those circumstances, no amount of soft pillow talk is going to prevent the euro from breaking past $1.40, leading to the prospect of still lower inflation.
The reason for the euro's strength is simple: the ECB's balance sheet is shrinking while that of the Federal Reserve is still expanding, despite the tapering away of its monthly asset purchases under the quantitative easing programme.
Janet Yellen, the Fed chairman, has been making it clear that she is no hurry to raise rates so the dollar is seen as a big sell. But, having been kept hanging on for so long, there is also a risk that there will be a sense of anti-climax if Draghi does act next month.
The likeliest policy response from the ECB is a cut in interest rates, which might involve negative deposit rates for the commercial banks as an inducement to get them to lend cash rather than hoard it.
Yet the impact of cheaper borrowing on the eurozone economy will be more symbolic than real and if the markets think more drastic action – such as quantitative easing – is needed any fall in the value of the euro resulting from an ECB rate cut will be temporary.
The danger with Draghi's playing-for-time strategy has always been obvious. Eventually, time runs out. As it has now.
theguardian.com
The ECB is worried about low inflation and the strength of the euro and is ready to act. But not quite yet.
Draghi will no doubt be chuckling to himself that the seduction technique again worked a treat. A flash of leg and the strong hint that good things come to those that wait was all it took to stop the euro breaking through the $1.40 level.
Markets are going to be mightily disappointed next month if it emerges that Draghi again declines to do anything. In those circumstances, no amount of soft pillow talk is going to prevent the euro from breaking past $1.40, leading to the prospect of still lower inflation.
The reason for the euro's strength is simple: the ECB's balance sheet is shrinking while that of the Federal Reserve is still expanding, despite the tapering away of its monthly asset purchases under the quantitative easing programme.
Janet Yellen, the Fed chairman, has been making it clear that she is no hurry to raise rates so the dollar is seen as a big sell. But, having been kept hanging on for so long, there is also a risk that there will be a sense of anti-climax if Draghi does act next month.
The likeliest policy response from the ECB is a cut in interest rates, which might involve negative deposit rates for the commercial banks as an inducement to get them to lend cash rather than hoard it.
Yet the impact of cheaper borrowing on the eurozone economy will be more symbolic than real and if the markets think more drastic action – such as quantitative easing – is needed any fall in the value of the euro resulting from an ECB rate cut will be temporary.
The danger with Draghi's playing-for-time strategy has always been obvious. Eventually, time runs out. As it has now.
theguardian.com
No comments:
Post a Comment