ECB set to take cautious stance as markets tumble

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The European Central Bank is likely to keep interest rates on hold when its policymakers meet on Thursday, even as a market crash, tumbling bank stocks and ebbing inflation set the stage for action later in the year.

The meeting of the Governing Council comes shortly after it cut the deposit rate in December, increasing the charge on banks for parking money at the ECB, and expanded its purchase program to buy chiefly government bonds.

This recent action, albeit short of what many on financial markets hoped for, has led economists to conclude that no significant further steps will be taken on Thursday but could follow as soon as March.

ECB President Mario Draghi may address the threat of low inflation, as oil plunges, as well as the market ructions caused in part by weaker Chinese growth.

Draghi may also face questions about falls in the price of shares and bonds of several banks, particularly in southern European countries such as Italy. The cost of insuring against a default of many of these banks has risen sharply in recent weeks amid fears over unpaid loans, signaling bleak times ahead.

Having raised expectations too high in December, however, Draghi is likely to stop short of making concrete promises, emphasizing instead the bank's readiness and ability to act.

"I believe the ECB will loosen policy but not today," said Joerg Kraemer, an economist with Commerzbank (DE:CBKG). "A further reduction in the deposit rate could happen in March."

A similar view was held by Reinhard Cluse, an economist with UBS. "The ECB is on hold for now," he said. "Draghi can say: 'we gave the medicine and now we have to let it work'".

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ECB's Coeure: QE is working ECB's Benoit Coeure speaks in Davos

  • ECB communicated clearly yesterday
  • ECB want's to make it work on a continuous basis
  • ECB stands ready to reconsider policy stance
  • ECB is committed to its mandate
  • Going back towards 2% inflation target is vital for the stability of the Eurozone
  • We have not given up on that goal
  • Need further clarity on regulatory frame work
  • ECB will not have a conversation next month on tapering
  • Conversation will be about ongoing unwanted consequences of QE

Very forthright comments from Mr Coeure

 

Thanks to Mario Draghi's comments after ECB meet yesterday, the markets got a sigh of relief and a positive hope in this environment of extreme pessimism. Markets have reacted very badly since the start of 2016. Global concerns over China and crude oil dragged all the global markets downwards making them fall more than 10%. Especially DAX which have fallen by more than 20% since the start of this year.

This indication by Draghi to extend the economic stimulus in Euro Zone further from March, injected spark of cheers among the investors. Even it is expected that going forward Bank of Japan and People's bank of China will also be adding more liquidity into their economies to push their economic growth process further. Along with this, technically the European Markets have reached their bottoms, which will act as a buying opportunity in the equity market.

 

MArio Draghi comments really gave a good sign of relief yesterday. i think the market has found its bottom. i expect a rebound to come soon for EURO STOXX and DAX, as european stocks price to earnings have discounted much more than in comparision to US shares. So i expect a 10% rebound for Euro Stoxx and 22% for DAX to trade above 11650.

I hope this comes to be true!

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