Wednesday, 28 June 2017

IS IT TIME FOR THE ECB TO TIGHTEN MONETARY POLICY?

Posted by Anonymous at 12:47 Labels: politics

It is of common knowledge that the European Central Bank President Mario Draghi is a strong defender of monetary policy stimulus. In his opinion, the recent spike in inflation is only a result of temporary oil price dynamics, which doesn’t justify a rate move at this stage.

“Nothing substantial has happened to inflation other than [changes in] the oil price and the food price, [...] It’s because of quantitative easing. We are here because of that. Quantitative easing has supported the economy throughout.”

However, Draghi surprised markets with an unexpected hawkish rhetoric on Tuesday. In his opening statement at the European Central Bank Forum in Sintra, Portugal, he hinted that the regulator might be considering scaling down its stimulus in the near term.

While the word “gradual” played a key role in his statement, market participants were shocked by the sudden change in his approach to the matter, which sent key European stock indexes to the downside and support demand for safe-haven assets such as gold.

Draghi stated: "The current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery. Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure."

He also reiterated that confidence in the current quantitative easing program is very high and its positive effects on the economy are evident.

"We can be confident that our policy is working and its full effects on inflation will gradually materialize. [...] All the signs now point to a strengthening and broadening recovery in the euro area," the ECB president said in the event.

But… is it really the time to start tightening its policy? Don’t know what you think but key analysts from the banking sector believe so.

"Right now consumers are confused, they don't understand negative interest rates, they don't understand a zero interest rate and the system becomes volatile as a result. We shouldn't have that," said Wiebe Draijer, chairman at Rabobank, in an interview with CNBC on Monday.

The news network also interview Carlos Torres Vila, chief executive of Spanish bank BBVA. In his view: "It should be a progressive unwinding… definitely not to spook markets too much but as (the regulator) sees inflation coming back with stronger growth rates then they should progressively start cutting back on their purchases and then raise rates."

Fort Financial Services