Author: William Pottenger
According to a report from The Financial Times, Mario Draghi, Head of the European Central Bank (E.C.B), announced on Dec. 3 that the Bank would extend its monetary easing program and lower interest rates further below zero. In the past, investors and the general public have viewed Draghi’s decision making as infallible, however, this time around the story is slightly different.
As outlined in an article from The New York Times, the E.C.B.’s bond repurchasing program is now scheduled to end in 2017 instead of 2016, extending the program an additional year. This action could be explained by policy makers fears about the European Union’s worryingly low inflation rate, which currently stands at .1 percent while the E.C.B.’s target inflation rate is 2 percent.
Another explanation for the E.C.B. altering its policy could be the looming rate hike from the United States Federal Reserve that many analysts believe is due to come before the year is out. Indicators such as consistently solid labour reports and improved levels of inflation point to Janet Yellen, Chairwoman of the U.S. Federal Reserve, lifting the federal funds rate for banks in the U.S..
After the E.C.B. lowered the interest rate that it charges to banks to hold funds from -.2 percent to -.3 percent, banks will now have more of an incentive to loan money and to do more business. However, according to a report from The Economist, investors expected a more dramatic policy decision from Draghi– the man who promised “to do whatever it takes to save the Euro” –than a .1 percent move.
Investors responses to the shift in policy has made the European economic forecast look bleak with the Euro Stoxx 50 index plunging three percent since Draghi’s announcement and the Euro’s currency strengthening. Normally, the increase in the value of a country’s currency indicates less willingness from foreigners to import that particular country’s goods, leaving the economy in a less favorable trading environment.
It used to be that bankers operated in more mysterious ways with less direct communication to the public. However, as the economy has become one of the chief concerns for the stability of a country, central bankers, like Yellen and Draghi, have become public figures, doing their best to clearly communicate the basic reasoning behind the decisions they make based off of complex financial models. Before Draghi’s press conference on Thursday, investors generally embraced his public statements with open arms. Despite investors timid reactions to the policy move, in a report from The New York Times Draghi is cited as expressing confidence that, given time, the public will realize that his decision was correct. Only time will tell.
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