ECB Changes Tone, As BOJ Does The Expected

Yesterday, the ECB completed its two-day meeting and decided to leave interest rates and deposit facility rates unchanged at 0.0% and -0.4% respectively. All this was in line with what the traders were expecting and as such, the euro was little changed.

While traders were waiting for the ECB rate decision, they were mostly focused on the statement accompanying the decision.

In the statement, the biggest news was about the officials’ decision to change the language about future rate increases. In the previous statements, the officials had committed to extend or raise the amounts of bond purchases if the economic conditions worsened.

As you recall, during the September’s meeting, the ECB announced the plan to start winding down the QE program in September this year. Starting January this year, the ECB slashed the amount of bond purchases by half and committed to unwind in September, if economic conditions improved.

In recent years, the European economy has been on a rollercoaster. It has outperformed the United States and other major economies. The unemployment rate, while uneven among EU countries, has improved significantly. Poorer EU countries like Greece are also seeing some improvements.

However, the EU economy continues to face a number of challenges. For the ECB, the major challenge is about inflation, which has failed to reach the 2% target. The low inflation has made the ECB lag behind the United States and the UK in normalizing interest rates.

Secondly, the EU faces the challenge of the rise of populism which started after the Brexit vote. The same happened in France during the election. While Macron won, the rise of Marin Le Pen and her movement cannot be ignored. In the just concluded Italian election, the populists got more votes than the traditional parties.

Third, the EU faces a problem of a trade war with its largest market. Yesterday, Trump signed a proclamation on steel and aluminum tariffs, which will affect the EU. In retaliation, the EU has created a list of goods that they could levy on American products. A trade war is not good for either economies. In the statement yesterday, Mario Draghi said,