Summer Is Over—But the European Central Bank (ECB) Is Not Yet Back to Work

The ECB met last Thursday, and announced it would keep the main refinancing rate at zero and will continue to buy back sovereign and corporate bonds at the rate of Euro 80 billion a month. The ECB again revised down its forecasts for inflation and growth.

Though the markets were looking for more stimulus, all they got was Mario Draghi’s promise the ECB will look for ways to continue its bond-buying program beyond the end date of March 2017 despite a scarcity of eligible bonds.

We believe the ECB can always find more bonds to buy if it lowers its standards!

However, at a time when many European sovereigns already trade at a negative yield, and when even some high yield corporate bonds trade with a negative yield, we wonder just how much firepower the ECB has left.

The markets sold off on the ECB announcement, with yields rising and stocks falling. But you can’t place all of the blame on the ECB, as markets are starting to understand that continued global monetary accommodation should not be taken for granted and may even become less effective over time.

It is clear the ECB has a problem. It wants to continue this experimental monetary policy until inflation has a fighting chance of making it to 2.0%, but the chart below shows that the policy has had little success. Unfortunately, the best the ECB might reasonably hope for is the current lack of deflation and recession.

Sources: The European Central Bank, The Financial Times, Bloomberg