The ECB stubbornly refuses to give hints to the markets on further plans to tighten monetary policy. Mario Draghi disappointed investors on Thursday stating that the Council has “never discussed” whether it will be necessary to stop the liquidity support to the economy when the right moment comes.
The ECB’s activity on the debt market will decrease from 60 billion euros to 30 billion in January, which will continue until September next year. Then, the policymakers may consider the possibility of further reduction of the bond-buying program with an extension of the program for an indefinite time. Nevertheless, according to Draghi, the Central Bank expresses concerns over the effects of low rates and takes stock of the financial risks associated with it. Draghi rejected the idea of systemic risks or risks of uncontrolled price increases associated with ECB’s support but warned that there are signs of overheating in the stock markets in some regions of the block.
Deposit rates and interest rates were left unchanged.
The head of the ECB also noted that the Eurozone is ahead of the US in terms of economic recovery, however, the Central Bank is not going to join the race of interest rate increases. Obviously, the weak euro remains the target for the ECB, so there is no reason to expect any hint of an increase in the yield curve. Together with the tax reform in the United States and the expectations of a 4-fold increase in rates next year, the investment focus will likely be reverted to assets across the pond.
Having reached the peak at 1.1850, the pair EUR/USD plummeted to the level of 1.1770 but again returned to growth on Friday. The ECB did not give new information on the pace or timing of tightening, so the further growth of European currency against the Dollar looks very questionable.
The FOMC meeting
On the contrary, the Fed followed its promises on Wednesday by raising the rate by 25 percentage points and published improved economic growth projections for 2018, confirming expectations of a 3-fold increase in the rate next year.
Of the key changes in the formulation, we can single out Fed’s expectations on the labour market. According to the FOMC report, employment will now “remain strong” while the previous statement said that “the labour market will continue to strengthen”. In other words, unemployment, as a driver of growth begins to weaken.
Yellen also noted that her successor, Jeremy Powell, supported the consensus in the Fed decision, once again hinting that with the new Fed’s head the policy will undergo minimal changes.
In the latest statements of the regulator, attempts are being made to find a delicate balance between reactions to positive changes in the economy and weak inflation, which restrains the intentions of officials to tighten the policy. In addition, the mystery of a weak price increase remains unsolved, the CPI report showed on Wednesday. The base price index fell to 1.7% in November, although the market expected growth of 1.8%. It seems that the effect of natural disasters begins to wane.