Monday 17 June 2019

Draghi forced to ease jitters on markets over QE stance

ECB President Mario Draghi. Photo: REUTERS
ECB President Mario Draghi. Photo: REUTERS

Gretchen Friemann

European Central Bank President Mario Draghi has been forced to reassure markets that the bank won't rush to raise interest rates.

Markets were initially roiled by the ECB's decision to abandon an explicit pledge to ramp up its crisis-era bond-buying programme in the event of an economic slowdown.

The ECB's move was seen as a signal for future monetary tightening, and caught investors by surprise.

Mr Draghi also explicitly warned about the risk from US President Donald Trump's proposed tariffs on foreign steel and aluminium imports, setting off retaliatory threats and raising the spectre of a global trade war.

"If you put tariffs against what are your allies, one wonders who the enemies are," he said. "We are convinced that disputes should be discussed and resolved in a multilateral framework, and unilateral decisions are dangerous."

European bond yields widened and the euro spiked against the dollar before Mr Draghi soothed investor nerves and signalled he would play it safe in terms of raising interest rates.

Austin Hughes, chief economist with KBC Ireland, said there is little expectation the ECB will increase base rates until well into 2019. He characterised the initial market reaction as a "storm in a teacup". However, he acknowledged the decision to remove the so-called 'easing bias' - the explicit commitment to intervene aggressively in the bond market and expand the quantitative-easing programme - had "blindsided some people".

But Mr Hughes pointed out that Mr Draghi repeated earlier pronouncements on the need for "patience and persistence" in monetary policy if inflation is to return to more normalised levels.

The outbreak of nerves came after a €1bn bond issuance by the State debt agency, the NTMA. Two €500m notes, maturing in 2022 and 2028 attracted a yield of 0.109pc and 1.07pc respectively.

The deal brings the Government's borrowing to €6.25bn for the year, close to half of the lower end of the €14bn-€17bn target issuance range for 2018.

Philip O'Sullivan at Investec said his bank doesn't foresee a rate rise until the "back end" of 2019. But he warned that the market jitters underscore the level of sensitivity needed by the ECB as it attempts to wind back its multi-trillion euro stimulus package.

He pointed out that bond yields are expected to rise this year and said the NTMA deserved praise for "frontloading" its issuance.

He claimed the agency had displayed its "customary alertness" and the strategy to issue close to 40pc of the lower end of its target issuance "would ultimately save taxpayers money".

The NTMA's cash buffers sit at close to €18bn and while it faces relatively few redemption payments this year, it must refinance over €30bn in 2019 and 2020.

Yet while markets were swiftly soothed by Mr Draghi, Austin Hughes warned that events "may overtake him" given the multiple downside threats, most notably President Trump's plan to impose tariffs on aluminium and steel imports.

While the ECB is taking baby steps, a notable hawkish spin has emerged at multiple central banks in recent months.

Bank of England policy-makers say they may need to raise rates faster than previously anticipated and new Federal Reserve chairman Jerome Powell has talked up the economy so much that there's talk of four US hikes this year.

Irish Independent

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