THE ECB, DRAGHI’S LATEST HITS. NEW QE AND INTEREST RATE CUTS

Rocco Bove, Head of Fixed Income at Kairos, studio guest with Giorgio Arfaras, Director of Centro Einaudi’s Lettera Economica, was interviewed live by Class CNBC for his immediate reaction to the monetary policy decisions expressed by Mario Draghi at the last ECB meeting held on Thursday, 12 September.

The ECB: DRAGHI FIRES HIS BAZOOKA AGAIN

These are the most recent measures taken by the European Central Bank:

• cut interest rates on deposits by 10 basis points to -0.5%;
• leave interest rates on principal financing and refinancing transactions relatively unchanged, at 0% and 0.25% respectively;
• restart Quantitative Easing with € 20 billion a month from this coming 1 November;
• exempt a portion of banks’ liquid assets from the negative deposit rate.

After having explained the positive aspects of this once again accommodating monetary policy, which maintains the short-term balance of the markets, Rocco Bove highlighted the need, expressed by Mario Draghi and Christine Lagarde, for immediate intervention in tax policy and structural reform plans as well: A Game Changer for getting to the places where monetary policies fail.

In reference to the relaunch of Quantitative Easing, “The markets were initially disappointed by the slightly smaller magnitude than what was expected, a sentiment immediately tempered by the duration, which is notably greater than anticipated. In fact, QE will last until inflation returns to around 2%, a salient point already nick-named ‘QE Infinity’ by analysts. This decision has made the markets very happy and given way to a rally. In the mid-term, the situation gets complicated. Christine Lagarde has a delicate task and an uncomfortable legacy. One corrective action might be to include other instruments, such as Senior Bank obligations, for example, in the QE plan to help make the monetary policy more expansive and efficient”, commented the Head of Fixed Income at Kairos.

As for Italy, a country with a still very high level of public debt, even here the Manager sees the bright side: “It is extremely fortunate that the interest rates at which the debt needs to be overhauled are at historical lows. Banks remain the biggest problem because they hold a lot of BTPs linked to the real economy, but even that, for the moment, is improving”.