Thursday afternoon heralded a sharp period of volatility for the euro as the ECB decision on rates, and requisite press conference, was released to the public. As expected, the minimum bid rate remained steady at 0.00%, but the Draghi PR train subsequently steamed in to town and what was to follow was to be considered farcical at best.
Despite the need to address the expectations channel, Mario Draghi took to the podium and largely avoided talking about any form of future easing, or increased stimulus. The venerable central banker (and propagandist in chief) instead chose to focus upon the message that ECB policies must be given time to be effective. Subsequently, the ECB missed a key opportunity to impact the markets expectations and, instead, left us wondering what’s next from the central banks bag of tricks.
Subsequently, the euro was largely on a sharp roller coaster ride as the market scrambled for any bits of information to react to, rising to a high of 1.1360 before pulling sharply back to close well down around the 1.1283 mark. Typically, wild volatility such as this around a rate decision implies that the central bank has done a poor job at signalling their expectations in the lead up to the meeting.
However, despite the wide trading range, a surprise rate cut from the ECB didn’t eventuate as some pundits had predicted. Unsurprisingly, many were therefore caught on the wrong side of the trade and there was a bevy of repositioning going on throughout much of the related press conference. There was a limited view that Draghi might actually walk away from his prior statements of no further rate cuts and surprise markets with a decisive move. Thankfully, this did not eventuate but the ECB Chairman did soften his stance significantly in his press conference following the event.
Although there was an overarching focus upon allowing the ECB’s policies time to work their way through the system, there were some interesting comments to follow. Interestingly, Mario Draghi suggested that the ECB sees rates at present or lower levels for an extended period of time. This statement seems to imply that future rate cuts would be a serious consideration given any further slipping demand.
Subsequently, it would appear that negative rates could be on the cards within the Eurozone in the near future given that the IMF’s forecast for global growth seemingly appears to be constantly downward revised for 2016. Given the fact that the Eurozone is upon the zero lower bound, any shocks to the economy would likely see the introduction of NIRP. At this stage in the cycle, most central banks are in an easing phase, especially throughout emerging markets in Asia-Pacific, and it is therefore intuitive that any diminished growth within these countries is likely to flow through the trade channels to impact both Europe and the USA.
Ultimately, the Eurozone economy isn’t out of the woods yet, and despite their protestations otherwise, are facing just as challenging trade and financial risks as other economies within the global system. Draghi might not yet wish to push a dovish barrow, lest his use of the expectations channel become a self-fulfilling prophecy. However, the risk of slipping global growth in 2016 is increasing, and we might just see NIRP in the Eurozone before the year speeds to a close.