Draghi Delivers, but Now What?

Draghi delivered.  He managed to get approval for everything.  Rate cuts, acceleration of purchases, including corporate bonds to the purchase program and new long-term repos were announced.   The knee-jerk reaction was favorable.  The euro fell over 1% and peripheral European bonds rallied.  

The deposit rate was cut 10 bp to minus 40 bp.  The asset purchases were increased by 20 bln euros a month to 80 bln.  Investment grade, non-financial corporate bonds would be included, easing concerns of a shortage of assets.    There will also be new long-term repo operations starting in June. 

The euro's sell-off is the biggest since November.  At the start of Draghi's press conference the euro slipped through last week's low near $1.0825.  A break of $1.08 would signal a test on $1.0750 and then $1.0710, the low from earlier this year. 

With today's actions, the ECB has unleashed its quiver, and it is unreasonable to expect it to do more until it sees the impact of today's action.  The new TLTROs (four year duration) do not begin until June.  The rate can be as low as the deposit rate.  This means that the ECB will pay banks to take funds.  These considerations would likely keep the ECB sidelined then until late in the year.  Many are framing the issue now in terms of the effectiveness of the measures.  This is indeed important, though we are not particularly optimistic. 

 Instead, we think the ECB is ultimately buying time.  The idea is that base effect, stabilization of commodities, and continued economic expansion will absorb more slack, and this will see price pressures firm later this year. 


Draghi Delivers, but Now What? Draghi Delivers, but Now What? Reviewed by Marc Chandler on March 10, 2016 Rating: 5
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