So Mario Draghi today fired what was supposed to be his big bazooka of monetary stimulus, but when the markets had digested the new schemes the ECB has cooked up they decided that it failed to hit the target. The ECB played ball by lowering the benchmark refinancing rate by 5bps to 0% and the deposit facility rate by 10bps to -0.4%. They also increased the quantitative easing programme by €20bn, and this will now be expanded to include corporate debt. But where Draghi missed was when he in the subsequent press conference indicated that this might be as far as the ECB was going to go.
The ECB are somewhat different to other central banks, in that they are not beholden to a specific government, but rather have to contend with the different agendas of countries like Greece and Germany (apologies to those readers who choose to believe that central banks are truly independent). So while the BoE and the Fed are aligned with their respective governments in their policy objectives, the ECB are not: they want to pursue an expansive monetary policy, but the fiscal policies of the Eurozone governments are not so accommodating. Of the big European economies, France, Spain and Italy are all close to the deficit limits imposed by the Stability and Growth Pact, and Germany’s electorate has little appetite for more spending. So the Draghi-led ECB has been doing most of the easing in the Eurozone. Now they are starting to realise that their bazooka is not so potent a weapon anymore, and yesterday Draghi told the markets that he may put it back in his holster.
Traders, who have been accustomed to central bankers doing everything to inflate the bubble economy stimulate the economy, didn’t expect Draghi to be ruling out further rate cuts, so the Euro and gold rallied (gold rallied because the Dollar sold off, but why gold is reacting only to the Dollar and not to other fiat currencies is bizarre) and stocks tanked. It was of course predictable that markets would be spooked by the indication that there are no more easing to come, but if -0.4% is not enough, what is? Draghi at least is aware that negative rates is a major problem for the banks, which is why he introduced another new policy designed to allow banks to borrow from the ECB at negative rates if they use it to expand credit to the “real economy”. But how many absurd measures to patch the holes left by other absurd measures will it take before they actually start discussing whether the whole easy money paradigm was a mistake in the first place? In any case, the markets are starting to realise that the omnipotence of central banks may be coming to an end.