Was Thursday the peak for monetary policy?

European equity markets initially welcomed an announcement that the ECB followed through on their promise to introduce further simulative measures, and even beat market expectations. This news followed on from the Bank of New Zealand announcing a 25bp cut in interest rates earlier in the day. We shall see, as was the case when Japan imposed negative deposit rates, whether an initial euphoria will then be met with caution. The ECB extended its quantitative easing programme from 60bn euros to 80bn euros, and lowered deposit rates further into negative territory. The bond purchase scheme was also extended to corporate bonds as well as government debt. Mario expects that the measures taken on Thursday would not need to be extended further.


In the following press conference the ECB chairman, Mario Draghi, addressed a couple of questions that capital markets have worried about in the past months. Firstly he believed Thursday’s measures demonstrate that central banks have not run out of bullets to help stimulate the global economy.  Addressing the effect on banks of negative rates, Mario Draghi acknowledged that some banks have business models that do not benefit from negative rates. For that reason the ECB also introduced measures to help support bank margins during periods of negative rates. These measures helped reassure the banking sector to be one of the better performing sectors during the day.


Mario Draghi did ask the question in support of the moves made by the ECB in the past months, what would have happened if the ECB had not taken these measures? Not sure anyone knows the answer to that question.


 Equity markets sold off as the day wore on, it will be interesting to see if capital markets come to decide Thursday’s move from the ECB will mark the peak of global monetary stimulus from the major central banks. The ECB stressed today that they felt this was as far as they need to go. The Fed is looking to raise rates this year. The Japanese central bank has seen the reaction to negative rates, and may be reluctant to do more. The exception is the possibility that the Bank of China may add monetary stimulus to stimulate that economy. There is no indication at present that the Bank of England is contemplating further cuts. Even if it is the case that we are at the peak, the flip side is that monetary policy is not tightening significantly any time soon.


Equity markets have seen a strong bounce as sentiment, at the low point in February, was apparently reaching levels seen in the dark days of 2009. Most consensus views are that after a volatile start to the year, this pattern will remain for the rest of the year. Whatever the outcome for the year, one thing can be guaranteed capital markets rarely do what’s expected. 

Posted on March 10, 2016 .