#UK DRAGHI’S BAZOOKA: What to expect from the ECB’s massive meeting today


Draghi ECB Mario

The European Central Bank meets on Thursday, and analysts are expecting a major announcement.

In late October, ECB President Mario Draghi dropped a major hint that there was going to be more monetary easing in the very near future — either in the form of further interest rate cuts, or some form of boost to the quantitative easing programme.

In a speech this November, Draghi doubled down, saying that the ECB “will do what we must to raise inflation as quickly as possible,” a phrase a bit like his “whatever it takes” speech in mid-2012, which was credited with bringing an end to the euro crisis.

The meeting concludes at 12:45 p.m. GMT (7:45 a.m. ET), when we’ll get any announcement of changes in interest rates, and the crucial press conference starts 45 minutes later.

Here’s how things stand at the moment:

  • The last ECB interest rate cut (the 11th since November 2008) came in September 2014, when the deposit rate was clipped from -0.1% to -0.2%. Two other policy rates — the fixed rate and the marginal lending facility — were cut to 0.05% and 0.30% respectively.
  • In January 2015, the ECB announced a QE programme. It entailed buying €60 billion ($63.41 billion, £42.46 billion) of investment-grade government debt and some other securities it was already buying in smaller schemes, per month.
  • This was meant to last until September 2016, or until the central bank saw a meaningful pick-up in inflation. Soon after, the eurozone recovery reached a recent peak, hitting 0.5% GDP growth in Q1. It’s since slowed to 0.4% in Q2 and 0.3% in Q3.
  • There has been very little pick-up in inflation over the period since QE was announced. Because of tumbling oil prices, consumer prices have risen by basically nothing on aggregate this year. Core inflation, which strips out volatile prices like fuel, rose by 0.9% in the year to November, about half of what the ECB would like.

And here’s what’s on the table in the upcoming meeting:

  • The ECB could cut rates. Draghi previously suggested the September 2014 cut was the lowest the ECB could go, but revised his view in October, saying that other central banks had managed to cut rates further into negative territory.
  • They could boost QE. This could mean a number of things. The ECB could extend the universe of bonds it’s willing to purchase, into things like municipal bonds. It could extend the suggested end of the programme, or it could increase the amount purchased monthly.
  • They could do both. This would be the both barrels approach — doing both would also loosen up the limits on how much QE can be done. Currently, the ECB can’t buy bonds yielding less than the deposit rate (-0.2%). With an increasing weight of EU sovereign bonds carrying negative yields, that would widen the scope that could be bought.

The one thing that’s clear is that it has to be big. Markets have now priced in a move from the ECB, and if they’re disappointed it’ll likely mean a stronger euro and a slump for European equities, at least in the short term. 

What’s interesting is the lack of opposition that Draghi’s comments have prompted. Since October, resident Hawks like Bundesbank chief Jens Weidmann have done little more than make lukewarm comments opposing monetary easing in general.

Over at the FT, Gavyn Davies referred to the ECB as having “the zeal of a convert.” It was years behind other major central banks in its adoption of unconventional measures like QE, but now that it’s there, it seems to be far less conservative about its approach.

The combination of the impending easing from the ECB and the impending rate hike from the Federal Reserve has analysts expecting the euro to fall to parity with the dollar for the first time in more than a decade — analysts at Deutsche Bank, Capital Economics, Macquarie, Citi, Goldman Sachs, Credit Suisse are all expecting a 1:1 exchange rate between the euro and dollar to be reached in the next few months.

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