ECB monetary policy discussion: Key Points Covered in this Podcast:
– Why ‘easier’ monetary policy is necessary in the eurozone
– Will the plight of Italian banks impact ECB monetary policy?
– The euro: How long will it continue to fall?
In this edition of our podcast Trading Global Markets Decoded, our host Martin Essex is joined by DailyFX analyst Nick Cawley. On the agenda: the recent ECB monetary policy decision to prepare central banks for rate cuts – and the path forward for the ECB. Is trouble brewing? Benefit from our discussion with Nick Cawley and listen to the podcast by clicking on the link.
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On July 25th, Mario Draghi sent a clear signal to the ECB policy meeting that interest rates will be reduced by a minimum of ten basis points at the September meeting. The central bank was also clear about restarting the quantitative easing program – whatever possible to boost growth and inflation in the eurozone.
Why is ‘easier’ monetary policy necessary in the eurozone at the moment? ‘All the data has shown growth is slowing in the eurozone,’ Nick says, pointing to global trade wars, general market uncertainty, and low ECB projections for growth.
‘When you couple this with stubbornly low inflation, there needs to be new fiscal stimulus to reboot the economy, and get growth and inflation up to or even close to the levels the ECB are looking for.’
The latest data points seem to underline that growth is going to be still weaker in future than it is already. ‘The manufacturing sector around the eurozone is in real trouble,’ Nick says. ‘Germany is [supposedly] the powerhouse of Europe in manufacturing and the latest Purchasing Managers Index data is awful.’
Indeed, the figures show ongoing contraction, with order books low. ‘You can’t let this carry on for too long because if it becomes entrenched you’ll see an economy that’s just going to contract and contract further.’
Could the ECB have raised rates sooner?
Did the ECB have the chance to raise interest rates sooner? ‘It was mooted at the end of last year that they were going to embark on small interest rate rises in 2019,’ Nick says. ‘But since then global trade has affected the economy.’
Is the weakness of EUR/USD more to do with a strong US Dollar or weak euro right now? It’s mainly to do with the systemic weakness in the euro,’ Nick says. He points to the German Bund and its negative rates for 20 years. ‘When you have this interest rate structure and negative yield curves, it’s difficult for a currency to have any kind of appreciation, especially when you have the yield differentials that you had maybe at the beginning of the year against USD.’
Will the euro continue to fall? ‘I do see it as a long-term trend, I see nothing on the horizon that would take me from a bearish position to a bullish position to make me want to buy the euro.’ As for EUR/GBP, Nick doesn’t see highs broken in the short term or if they are it would indicate to sellers there may be another opportunity there.
In July’s policy meeting, the ECB signaled lower interest rates, more QE, but also a tiered structure of rates. Does this reflect the troubles faced by eurozone banks?
‘The decision about a tiered structure decision has been around for some time and is indeed to do with the European banking situation,’ Nick says. ‘When you look at results from the likes of Deutsche Bank and UBS, the euro banks are finding it a terrific struggle to make money in the present interest rate environment.
‘Banks need positive interest rates to make money in a traditional banking model. There is also the TLTROs that are coming in, which show the ECB has taken into account the situation in European banking and are aware of problems that lie ahead.’
Can stocks continue to rise?
Looking elsewhere, stocks are at a record high; can this continue? ‘If investors can’t make money in the bond market they’ll look somewhere else. And stocks will benefit from this new liquidity wave that we’ll see.’
Gold has also had a great run recently. ‘When there are negative yields in the bond market then zero yields on gold begins to look attractive,’ Nick says.
‘Money needs a home. Some of the stock markets do appear overvalued but there’s still money coming in to buy them and then it comes back to supply and demand.’
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