The ECB meeting on the 21th of April was, as expected, a clear nonevent, with no monetary policy change being announced. The pace of the QE programme has not been increased, holding at €80bn per month and rates remained unchanged (main refinancing at 0%, depo rate at -0.4% and marginal lending at 0.25%). Most of the following press conference after the rate decision was verbal intervention to maintain confidence in ECB policy. ECB President Mario Draghi also confronted recent criticism expressed by German policymakers saying that this come down to a delay in the achievement of the monetary policy objectives and “therefore the need for more expansion”. Tensions are rising between Germany and the ECB over the European institution’s current monetary policy. Germany believes that QEs and low interest-rates are destroying its economy and that what may be good for most of Europe is not, in the end, good for them, as they bear the brunt of the cost. In our view, German concerns are definitely legitimate and the overall efficiency of the current monetary policy should indeed be brought to the table.
Eurozone Inflation should remain weak
Draghi also mentioned that the path to the inflation target will take more time. This path is clearly very complex and the former Goldman Sachs banker added that inflation may in fact enter into negative territory before coming back to positive. Does this mean there will be no positive results achieved this year? Draghi is definitely trying to maintain confidence in the ECB monetary policy despite likely adverse results in the short/ medium term.
Credibility is the key
Mario Draghi spent the rest of the press conference walking a line between supporting confidence in the Central Bank and adding downside pressures to the single currency. Too much concerning Brexit rhetoric for example would have pushed the EUR further downward but would have also affected the European institution’s credibility and created useless volatility. He was therefore too reluctant to go too much further into detail about monetary policy expansion and his European’s future economic outlook concerns. Helicopter Money is not at the moment a viable scenario and we should not see any FX intervention in the short-term. Scrutiny is growing as current ECB actions seem unable to pave the way towards higher growth and inflation. The institution’s credibility is still solid for the time being…but for how much longer will this last? Next week the April FOMC meeting will take place and we firmly believe that financial markets are becoming increasingly disappointed with US monetary policy. Currency wise, we remain bullish EURUSD as the renewed dovish stance of the Fed should continue to add upside pressures to the pair towards 1.20.