ECB Rate Decision Delivers No More Free Money to the Markets

Jon C. Ogg

President Mario Draghi and the European Central Bank (ECB) may have dashed some of the ambitions of investors who have been hoping for the endless quantitative easing money that they have grown so used to. The latest ECB report took wind out of the equity markets.

At Thursday’s meeting, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged. That was largely expected and will be at 0.00% (main refinancing operations), 0.25% (marginal lending facility) and −0.40% (deposit facility).

The official statement showed that the Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended time. Despite no new serious asset purchases, Draghi and his team did indicate specifically that these same interest rates would remain at or lower than the current rates well past the horizon of the ECB’s net asset purchases.

The ECB further said:

Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Draghi’s commentary is what may have dashed some hopes here for those who want the endless central bank money to continue. The reality is that the ECB’s available target for bond purchases may be running out of supply.

One issue to consider is that the ECB staff are actually changing their forecasts for GDP:

  • 2016 GDP growth was put at 1.7%, versus 1.6% seen in June.
  • 2017 GDP growth was put at 1.6%, versus 1.7% in June.
  • 2018 GDP growth was put at 1.6%, versus 1.7% in June.

Other comments from Draghi’s notes were seen as follows:

  • The baseline scenario is subject to downside risks, and risks to the outlook of growth have tilted to the downside.
  • Real GDP is expected to grow at a moderate but steady pace.
  • The ECB will act using all instruments if warranted, and the committee has been tasked to evaluate options for securities and asset purchases.
  • There have been sustained employment gains supporting support for households, but the recovery is expected to be dampened by subdued foreign demand.
  • Inflation is expected to pick up near the end of 2016, although it is expected to remain low over the next few months.

The S&P 500 index was last seen down over five points at 2,180.5 and the Dow Jones Industrial Average was down 54 points at 18,472. The Nasdaq was down roughly 22.5 at 5,261.4.