Draghi signals the beginning of the end for easy money

Draghi signals the beginning of the end for easy money


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The Euro slides against most currencies as Mario Draghi met the expectation of end a prolonged period of easy money, but at a slower pace than expected.

After the European Central Bank’s board meeting in Riga on Thursday, Draghi made clear than nothing will change this summer and the bond-buying programme will continue until December. Since January, the ECB is buying €60bn in government bonds a month. From July to September the ECB will continue to buy €30bn; from October to December, this will be reduced to €15bn a month. The massive €2,4 trillion programme ends January 1st.

Moreover, the President of the ECB committed to subdued interest rates at record low levels for “as long as necessary” to reach the 2% target rate of inflation. The ECB was the first major central bank to introduce an interest rate below zero in 2014, following the example of Sweden.

Currently, interest rates stand at 0% for refinancing operations, 0.25% for the marginal lending facility, while banks pay a negative interest of -0.40% for deposits. And “as long as it takes” could mean that these rates could persist for more than a year.

The ECB’s massive monetary support programme will end, but this is not the kind of policy shift expected. Mario Draghi notes that the economy is “in a better situation” but there is increased uncertainty. In 2017 unemployment in the Eurozone stood at 8,5%, which is the lowest in a decade but still not quite as low as other major economies. Inflation is surging but this is mainly due to a rapid rise in oil and gas prices.

It remains without saying that Italy has added volatility to the eurozone and the ECB prefers caution. Whenever the bond-buying programme ends, countries with more than a 100% of debt-to-GDP ratio will feel the pressure, which includes Spain, Portugal, Greece and Italy; France and Belgium will also feel the pressure. Interest rates hikes can be detrimental, as they were during the first sovereign debt crisis of 2011.

All eyes are on Italy, which intends to expand welfare spending by a minimum income programme and the introduction of earlier retirement. The new government is also planning a flat tax, calculating the loss of revenue will be compensated by a surge in growth. The sum of these policies could boost the deficit at a time when borrowing is about to get more expensive.

Across the Atlantic, the US Federal Reserve moved to increase interest rates, responding to strong retail sales. However, both the Bank of Japan and the People’s Bank of China appear to follow the European que of caution.

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