Home Central Banks ECB’s Non-Monetary Policy Stance Surprises Markets

ECB’s Non-Monetary Policy Stance Surprises Markets

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Written By: Richard Koch – Forex Focus

Euro slides to three-month lows versus the greenback following the October monetary-policy committee meeting.

The Governing Council of the European Central Bank (ECB) left key interest rates unchanged following its penultimate monetary-policy meeting for this year held in October. The interest rates on refinancing operations, marginal lending facility and deposit rates currently stand at 0.00, 0.25 and -0.40 percent respectively.

In the press release that followed the monetary-policy meeting, Europe’s central bank surprised markets by slashing the monthly asset-purchase program (APP) by half, from the current €60 billion to €30 billion. The sharp cut in the quantitative-easing (QE) program will kick-start in January 2018 and continue at least until the end of September, or until such time as the Governing Council notices the inflation rate return to the central bank’s projected target of 2 percent. The ECB also announced that it proposes to reinvest the principal payments from maturing securities for an extended period even after it ends its asset purchases, thereby leaving the prevailing liquidity in the markets intact. However, the bank made it very clear that if the future outlook in the eurozone deteriorates, it would stand by to reverse its policy on asset purchases in terms of size and duration.

During the press conference following the monetary-policy meeting, ECB President Mario Draghi stated that the monetary-policy decision of the ECB would lead to domestic price pressures, which remained muted, and that a certain degree of stimulus would be necessary for underlying inflation to build up and support headline inflation in the medium-term. He also mentioned that economic expansion in the euro area was broad-based and solid, with recent data and surveys pointing to unabated growth in the second half of 2017. A rise in the employment rate was lending support to private consumption and increasing household wealth, with the global recovery leading to a rise in eurozone exports. Speaking about the risks to growth, Draghi mentioned that the growth outlook remained broadly balanced, with sentiment indicators likely to surprise on the upside, while downside risks were primarily limited to global factors and the forex (foreign exchange) markets.

Speaking about loan growth, he said the net-loan demand continued to rise for all classes of borrowers. While credit standards for loans to households have eased, they remain unchanged for businesses, although the general settings for new loan applications have broadly diminished for all categories of borrowers, thereby providing easy access to credit growth across the euro area.

The ECB did not make any changes to its forward guidance in its October meeting, although scaling back its asset purchases is a sign of confidence that the broader economy is expanding on the back of improving macroeconomic conditions. Consumer inflation has nevertheless remained below the central bank’s target of close to 2 percent for most of the year and was expected to decline further in October, according to preliminary estimates, thereby giving very little room for the ECB to reverse interest rates that are currently at record lows and unchanged since March 2016. However, with the broader economy expanding at a moderate pace and household consumption and fixed investments growing on the back of rising employment in the euro area, Europe’s central bank expects core inflation to gather momentum as early as next year.

The announcements from the ECB failed to provide a timeline for the complete withdrawal of stimulus. Further, the central bank made no mention of when it would start tightening interest rates nor did it issue statements on the strength of the euro against the majors, disappointing markets and leading to a sell-off in the single currency.

The euro slid close to 1.4 percent versus the greenback and about 0.6 percent versus the pound sterling following the cautious broadcast from Europe’s central bank. Versus the US dollar, the euro settled at 1.1650 compared to the previous day’s close of 1.1812, a decline of 1.37 percent for the day, trading at its lowest level in three months. Unless the pair settles above near-term resistances at 1.1675, the euro could extend its losses to 1.1525-1.1550 over the next few sessions. However, if the pair manages to close above the resistances, the gains could extend all the way to 1.1775-1.1800.

EURGBP, on the other hand, remains bearish in the near-term, with key supports coming at the previous lows of 0.8750. A close below the supports could be extremely hard on the euro, with the currency likely to slide to 0.8450-0.8500. Near-tem resistances are placed at 0.8950, and if the euro takes it out successfully, the pair could test August highs of 0.9300.


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