(Photo: European Central Bank)

JAKARTA (TheInsiderStories) – European Central Bank (ECB) President Mario Draghi has called on authorities to keep the interest rate at its current 0 per cent level to anchor expectations – even after the central bank decides to wind down quantitative easing.

The ECB is currently sopping up excess with a purchase of some 60 billion Euros of bonds per month. European monetary policymakers are scheduled to convene for a policy meeting Oct. 26, arguing back and forth on the need for a reduction.

Even though ECB signalled last Sept it would end its bond-buying program, it remains unclear whether they will cut their monthly bond buying next year. Rumors have it that policy makers are split and cannot agree on how much debt Euro-area central banks will agree to buy in the coming year. There is a possibility ECB will cut its purchases by at least half from the current monthly 60 billion Euro purchase.

After more than 2 and a half years of trying to revive the region’s moribund economy through bond purchases, some governors see the recent period of robust growth as ample reason to rein in support. Others are concerned that a desirable degree inflation remains too feeble.

Any changes to the sum and time frame of quantitative easing would still fit into the ECB’s present guidance on monetary policy, which commits it to sustain adjustment consistent with its inflationary aims.

It also pledges that if the situation deteriorates, or if financial conditions become inconsistent with further progress toward a sustained adjustment in the path of inflation, the Governing Council will be ready once again to crank up the program, either in terms of size or duration.

“The central bank’s negative interest-rate policies have done nothing to damage bank profitability. ECB’s guidance aims for asset purchases to continue until officials see sustained improvement in the inflation outlook, and for interest rates to remain at current levels well past the time it stops buying assets,” he said, at the Peterson Institute for International Economics, Washington, yesterday, ahead of a G20 meeting.

In June 2014, the ECB moved the interest rate it pays to banks that park money with it into negative territory, effectively charging banks a ‘fee’ to leave cash on deposit. It subsequently cut it three more times, to its current level of minus 0.4 percent.

Critics have called the move counterproductive as it squeezes bank profits, yet Draghi said on Thursday the profitability of European banks has been increasing and is further forecast to rise as the Eurozone’s slow economic recovery continues.

“By and large our negative interest-rate policies have been a success. We haven’t seen the distortions that people were foreseeing. We haven’t seen bank profitability going down; in fact, it is going up,” he stressed.

Draghi added the policy has not done anything to hurt money market-funds either (another consequence predicted by naysayers). The money flowing into such funds, which park investors’ money in cash and short-term debt securities, has actually been increasing, he claimed.

Meanwhile, the Intenational Monetary Fudn this week predicted the Euro area will grow 2.1 per cent this year before slowing to 1.9 per cent in 2018. It estimated inflation at 1.5 per cent this year and 1.4 per cent in 2018.

Euro money market responded vigorously to Draghi’s speech. The Euro rose to 1.1878 against the US dollar, its highest level in the last 2 weeks. After Carles Puigdemont tactically agreed to delay the independence of Catalonia , Spanish Prime Minister Mariano Rajoy allowed them five days to decide whether they intend to leave the Eurozone. In the meantime, the Madrid governance can hammer out a tough agreement with the Catalan regime.

In addition, the United Kingdom Pound sterling rose against the US dollar over the last four days straight. Expectation of a BoE rate rise in 4Q this year limits monetary policy divergent from the U.S Federal Reserve.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com

 

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