The Daily Update - From the Subprime to the Re-Stimulus - Over 10 Years on and the ECB Cut Rates and Renew QE

Yesterday Mario Draghi told markets that “The Governing Council reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time and continues to stand ready to adjust all of its instruments…” highlighting that the latest data showed “the persistence of prominent downside risks and muted inflationary pressures”. As such, yesterday Draghi announced an ECB cut in the deposit facility rates from -0.4% to -0.5% and €20 billion per month of open-ended QE. Importantly, the ECB will also introduce a two-tier system for reserve remuneration which will cushion the blow on the profitability of Europe’s major banks, as further negative rates bite.

The outgoing ECB President of “whatever it takes” fame seems to be leaving a somewhat divided yet ever-critical ECB to Christine Lararde, who takes over starting November. Draghi also highlighted the need for fiscal policy to support the economic stimulus his monetary intuition has presided over and boasted that “the creation of 11 million jobs over a short period of time, the recovery, the sustained growth for several quarters – were, by and large, produced by our monetary policy. There was very little else…” He went on to say that, “So, now it’s high time, I think, for the fiscal policy to take charge.” and that “There was unanimity that fiscal policy should become the main instrument”. He also mentioned that “Giving money to people in whatever form is a fiscal policy task, not a monetary policy task.” clearly suggesting that any kind of “people’s quantitative easing” would have to come via the politicians.

The ECB President did also highlight moderate growth so far in Q3 citing how “robust employment growth and increasing wages continue to underpin the resilience of the euro area economy.” As always Draghi expressed confidence that this “substantial monetary stimulus” would be more than enough to “support the euro area expansion” and keep financial conditions favourable. However, following the announcement, there were a number of dissenting voices from inside the ECB and French, German and Dutch Governors. Moreover, many warn of the ever lessening impact of these monetary tools, with Kit Juckes of SocGen describing Draghi and the ECB as “an ageing boxer, still up for the fight but unable to pack the same punch… and it’s crystal clear that the baton needs to be handed to fiscal policy sharpish.”

As a reminder, the current list of countries continuing or returning to easing includes: US, EU, UK, Russia, Turkey, Mexico, Brazil, South Africa, Japan, China, Hong Kong, India, Korea, Indonesia, Philippines, Thailand, Australia and New Zealand.