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Running with Scissors: Draghi Gives Market a Theatrical Wink Ahead of ECB Stimulus in September

The President of European Central Bank, Mario Draghi opened the door to rate cuts and the restart of bond purchases on Thursday, aiming to prop up confidence in a faltering EU, which has struggled with a manufacturing recession that risks unfurling years of stimulus.

In a press conference reported by Reuters, Draghi asserted that;

“A significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favourable and support the euro area expansion, the ongoing buildup of domestic price pressures, and, thus, headline inflation developments over the medium term.”

Sam Fuller, Director of Financial Markets Online, commented;

“Short of brandishing a pair of scissors for the assembled cameras, Mario Draghi’s hints about an impending rate cut couldn’t have been more explicit. The ECB’s forward guidance was littered with clues that Europe’s ratesetters are preparing to cut rates sooner rather than later. Most striking of all was the line about the Bank putting its researchers to work on finding a way for interest rates to be tiered. This raises the prospect of some rates plunging deeper into negative territory as early as September.

In practical terms this will mean depositors paying more to hold Euros – so a rapid exodus from the single currency has been the inevitable result. While the markets had expected a dovish performance from Mr Draghi today, the intensity of his dovishness – which included an increasingly bleak economic outlook and strong hints about the ECB restarting its money presses – has weighed heavily on the Euro and dragged it below a one month-low against even the embattled Pound.”

In practical terms this will mean depositors paying more to hold Euros – so a rapid exodus from the single currency has been the inevitable result. – Sam Fuller

Whilst Rupert Thompson, Head of Research at Kingswood, added;  

“Draghi emphasised that the risks of growth remain on the downside, inflation remains muted and the 2% inflation target is symmetric – implying that an overshoot would be tolerated to compensate for past undershooting. The news earlier this week of a further fall in manufacturing business confidence in the Eurozone can only increase the pressure for the ECB to ease. Options being considered include a cut in rates and a re-starting of its QE programme. The ECB has already updated its forward guidance to keeping rates at or below current levels through mid-2020. Exactly what the ECB ends up doing in September will most likely depend not only on whether the gloomy economic news continues but also on whether the Fed decides to cut rates by 25bp or 50bp next week.”

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