The European Central Bank's recent meeting and its decision not to raise rates until the summer of 2019 is an excellent opportunity to perform an analysis on the next steps in the Eurozone's monetary policy.
First of all, we would like to go over some concepts to acquaint ourselves with the Eurozone's monetary policy:
The ECB's objective is to maintain price stability in the Eurozone, which is considered to be around 2%. This differs from the US Federal Reserve in which the latter has a dual mandate of price stability and full employment.
To propel a rise in prices and thus avoid deflation, the ECB initiated an expansive monetary policy, consisting in lowering short-term interest rates and mass purchasing fixed-income assets in the Eurozone, also known as QE (Quantitative Easing). This measure caused a relief for debt holders and a problem for savers, who find it more difficult to obtain acceptable returns by investing in risk-free assets.
Focusing on the last ECB meeting, we can say that it is taking steps towards monetary normalisation. As indicated in the article by José Manuel Gonzalez-Paramo, BBVA's Executive Director Responsible for Global Economics, Regulation & Public Affairs Mario Draghi had not been so clear since the beginning of QE and he uncovers the path the ECB will follow in the coming months
We could summarise the main messages sent by Mario Draghi in two points:
The bond-buying programme is being extended from September, date initially envisaged, until the end of the year, although the amount will be reduced from €30bn per month to €15bn until the end of the year.
Interest rates will not rise until at least the summer of 2019. We would like to emphasize that the most important meetings take place quarterly, i.e. March, June, September and December; therefore, according to Draghi, we will not see a rate hike until at least September 2019.
Below you can watch the video of Jorge Sicilia, Chief Economist of BBVA Research, summarising the main points of the meeting and the President of the ECB's subsequent press conference.
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