ECB decides to keep rates unchanged despite market uncertainty
Amid recent events surrounding the U.K. referendum vote to leave the European Union, many people are wondering how the vote will affect the economy.
On Thursday, Sept. 8, the European Central Bank conducted a conference addressing various economic concerns and plans in regard to the eurozone’s current economic climate.
After much anticipation, ECB President Mario Draghi revealed that interest rates will remain as is and there is no plan to expand the bank’s quantitative easing program beyond its March 2017 expiration date. Members of the Frankfurt-based ECB conceded that the 80 billion euros per month bond purchasing plan would continue only if it is deemed necessary. According to The Guardian, Draghi partially blames the Brexit vote for raising uncertainty in the eurozone economy.
The purpose of the ECB’s quantitative easing program is to control inflation in order to encourage a strong economy across the eurozone.
This is said to be accomplished by central banks purchasing securities from banks with the intent to persuade them to give out a greater number of loans to the public, creating a positive economic cycle.
According to The Economist, this process is supposed to stimulate the economy, with the magazine claiming that, “Today, interest rates on everything from government bonds to mortgages to corporate debt are probably lower than they would have been without QE.”
With this in mind, it would make sense that Draghi’s lack of interest in extending the program would raise some concern. If the quantitative easing program were to stop, according to the claim above, there would be a good chance that interest rates could increase
According to Fox News, the bank’s overall goal is to reach an inflation rate just under 2 percent. The ECB claims that this rate is representative of a strong economy. Currently, the rate of inflation is at a mere 0.2 percent. Considering that the eurozone’s rate of growth is slow, calls for additional reform are warranted.
Fox reporters compared this inflation rate with eurozone’s July unemployment rate of 10.1 percent, suggesting other measures are worth considering. Fox News also notes that, “Any reduction in forecasts for inflation make more stimulus likely, if not this week then in coming months.”
The statement was made before Draghi addressed the public and agrees with the opinions of other analysts.
Opinions on Draghi’s decision vary widely, with some saying that it will hurt the economy, while others claim that it is not significant enough to make much of a difference without additional economic efforts in place.
Right now, the inflation rate is at 0.2 percent, well below the ideal level of 2 percent. However, improving economic data have experts reassured that the economy is sturdy with steady increases in inflation ahead.
There are varying views in terms of how this might shape Europe’s economic future, with some analysts under the impression that continuation of the quantitative easing program is inevitable.
Nicholas Melhuish, head of global equities at Amundi, spoke up about the risk associated with the termination of the quantitative easing program.
In his CNBC segment, he mentions that Draghi’s decision to not extend quantitative easing is not following the push of the market. Melhuish expresses that the reason for Draghi’s call may be linked with him having a more positive outlook on the European market. He also suggests that the internal politics of the ECB may be more complicated than they appear.
The Telegraph offers an interesting insight into the effects of the ECB’s decision to not discuss the quantitative easing program. According to their live timeline, the markets closed with mixed results following Draghi’s announcement that there was no discussion to extend the ECB’s quantitative easing initiative. The Telegraph explains how stocks faced a drop after the news was revealed.
It seems that the immediate results of this decision are uncertain. Sir Charlie Bean, a board member of the Office for Budget Responsibility, expressed a warning to those attempting to make economic forecasts.
In his opinion, more often than not, forecasts are too generous, leaving governments unprepared for the consequences of over-spending. The pound faced a slight decrease during intraday trading.
“Away from the euro, the pound is trading below $1.33, having skidded into negative territory after Draghi’s press conference,” according to The Telegraph.
In addition to the pound reacting to this lack of reform, Lukman Otunuga expressed the imbalance of the euro following Draghi’s press conference. It seems that the immediate reaction to this decision by the ECB is precarious and might call for some attention.
Ultimately, the ECB will have to monitor the behavior of the economy in relation to what they are able to control, and the eurozone will possibly see an extension within the next six months.