Last week the European Central Bank Governing Council met, and we all waited for news on when the EBC would start to taper its bond buying program and raise rates. Hints had been dropped; just recently Draghi declared deflation vanquished and growth is picking up, although inflation has been tame.
We were all waiting for the news…and are still waiting for it!
In last week’s official statement Draghi mentioned conditions may be ripe for a new look at the level of accommodation. “The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions…while the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim.”
The ECB has plenty of room to ease, as accommodation is still at extraordinary levels. The ECB’s deposit rate is stuck at minus 0.4%, that is, the ECB charges banks to hold its money, and the ECB is still purchasing 60 billion euro of securities monthly. With growth and inflation looking better, it appears tapering is just around the corner.
The next ECB Monetary Policy Meeting is September 7 th , and as usual the council will need to accurately read, not only the financial data, but also the mood of the markets . Too strong a statement on tapering and the markets could sell off like the U.S. taper tantrum in 2013. Too weak a statement and investors will wonder what is wrong with the European economy. It is not easy reading the mood of the markets, and mistakes happen.
The larger picture shows that Europe is slowly recovering from the financial crisis. Yet, in many ways Europe’s recovery is years behind that of the United States, as measured by GDP, inflation, unemployment and the strength of the banking sector. Normalization of rates in Europe would be positive. No central banker wants to go into the next recession with negative rates and a ballooned balance sheet.
But summer vacation is breaking out all over Europe, so we will just have to….wait for it!Source: The ECB, The FT, Bloomberg