What, if anything, does the ECB’s current outlook on interest rates and near term monetary policy tell us about the health of the global economy?

By |2017-03-14T11:41:40+00:00March 14th, 2017|Uncategorized|

The European Central Bank's new chief Mario Draghi gestures during his first press conference at the ECB in Frankfurt/M., western Germany, on November 3, 2011. The European Central Bank's decision to cut its key interest rates in a surprise move was "unanimous", the 64-year-old Italian said. Draghi's first few days as ECB president have certainly been a baptism of fire. The 17-nation eurozone is back in deep crisis following the shock call by Greece for a national referendum on a debt rescue reached with huge difficulty only last week. Draghi took over at the helm of the ECB from Jean-Claude Trichet. AFP PHOTO / DANIEL ROLAND (Photo credit should read DANIEL ROLAND/AFP/Getty Images)

Since the onset of the financial crisis and its subsequent reverberations through the global economy, the European economy has been severely tested. Not only did the financial crisis, in and of itself, lead to the most risk-off investing landscape on the continent since WWII, peripheral economic contagion triggered aggressive monetary response from Greece to Portugal and beyond that tested investor confidence in the ECB specifically and in the EU more broadly speaking. Eight years hence, Iceland has finally emerged from capital controls while Greece finds itself in the midst of yet another significant economic contraction. In spite of the uneven results of the ECB’s policy responses to a wide variety of challenges, investors received some unexpected and nuanced hints from Mario Draghi in last week’s ECB Policy Review that a shift in outlook may be underway. In the meeting there was discussion of dropping references to rates in coming meetings. That would be a significant departure from years of policy. Also after last week’s meeting, Mario Draghi was not willing to discuss any move in rates – irrespective of where the ECB stood on the timeline for the end of quantitative easing. Investors took this to mean that there is a real possibility that the ECB may move on rates sooner rather than later and possibly before ending QE. For example forward swaps on the Euro Overnight are pricing in a 10 bps rate rise in April of 2018. That may not seem significant but given the backdrop it may reflect a shift in policy that underscores a shift to a less accommodative outlook by the ECB in coming quarters and as a result a gradual move higher in rates sometime next year. Given the negative rate yield on sovereign debt that litters the European landscape, the nuance investors received last week from Mario Draghi may well be worth paying attention to.

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