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Trump hits out as ECB's Draghi urges governments to spend more - business live Trump hits out as ECB launches new stimulus programme to fight recession - as it happened
(32 minutes later)
Time for a recap:
Europe’s top central banker has swapped barbs with the President of the United States after announcing a new stimulus package designed to prevent the eurozone sliding into recession.
At one of his last meetings as ECB president, Mario Draghi unveiled a package of measures to ease monetary policy in the euro area.
The Bank:
Cut one of its key interest rates, the one charged on bank deposits at the ECB, to -0.5% to encourage lending
Left its headline borrowing rate at zero, but pledged to leave them alone indefinitely, until inflation has robustly risen
Agreed to restart its quantitative easing programme in November, with €20bn of bond purchases each month
Made its offer of cheap loans to banks more profitable
The ECB also slashed its growth and inflation forecasts, as it warned that economic conditions have deteriorated.
Draghi claimed there was broad support for his plan -- however, there are reports tonight that several members of the governing council opposed restarting QE.
The ECB president also warned that the risks of a eurozone recession has risen, with many economists believe Germany’s economy is already shrinking.
The move met an almost immediate response from the White House, where Donald Trump has been lobbying America’s central bank to cut interest rates.
Controversially, Trump claimed the ECB was deliberately weakening the euro to help companies sell goods overseas:
European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!
This prompted a swift rebuttal from Draghi, who insisted that he was simply following his mandate.
We have a mandate. We pursue price stability and we don’t target exchange rates. Period.
He also warned America that G20 countries have a commitment not to indulge in currency depreciations.
Draghi spent much of his press conference dropping non-too-subtle hints that European governments should rip up their deficit targets and borrow more, to encourage growth.
At one point he seemed to hint that monetary policy has gone lost as far as it can:
Almost all the things that you see in Europe, the creation of more than 11 million jobs in a short period of time, the recovery, the sustained growth for several quarters, were by and large produced by our monetary policy. There was very little else… Now it’s high time for the fiscal policy to take charge.”
Draghi: We are very concerned about the pension industry and related services. Negative rates are necessary instruments of monetary policy. It has created a lot of positive effects. How do we speed up these effects so that interest rates can go up? The answer is fiscal policy.
Economists broadly welcomed the package, while warning that it has its limits.
As Florian Hense of Berenberg Bank put it:
Will the ECB package make a major difference? Probably not. The impact of further easing on business and household spending is likely to be very small. In a situation that is almost akin to a liquidity trap, ever more negative rates comes close to pushing on a string. Nonetheless, further easing can still help to contain the downside risks. First, the ECB can prevent market turbulence which could potentially exacerbate the drag on the real economy from the challenging environment of trade wars, Brexit and the Chinese slowdown. Second, by lowering funding costs further, it can make it easier for governments to finance a modest fiscal expansion and nudge countries with some extra fiscal space to actually use it – think Germany.
Relative to previous net asset purchases of €60bn or even €80bn per month, the ECB’s new open-ended purchase programme looks modest. On their own, purchases of €240bn in one year will raise the balance sheet of the Eurosystem by c2ppt of GDP in a year from its current level of close to 40%.
Although Draghi is not leaving before November, today’s meeting will be remembered as his major final act. Given the bigger-than-usual divisions within the Governing Council, Draghi probably had to go all in to sway (most of) his colleagues to play largely the melody he had set out at the ECB’s annual gathering in Sintra in early June.
Newsflash: Bloomberg is reporting that several members of the ECB governing council opposed parts of today’s stimulus programme.
That includes some of Europe’s largest economies - Germany, France and the Netherlands, along with Estonia and Austria.
I mentioned earlier that Draghi seemed reluctant to reveal the mood at today’s meeting, joking that the committee were unanimous in believing fiscal policy has a bigger role to play.
Clearly they were not unanimous about cranking up the money-printing machine again.
Draghi said there was no need for a vote. Now we're learning the dissenters on QE resumption: France, Germany, The Netherlands, Estonia, Austria...
After fluctuating through the afternoon, European stock markets have closed at their highest levels in six weeks.
Investors are welcoming the ECB’s new stimulus package, while also aware that monetary policy alone won’t save the world economy (which is why Draghi is pushing for government’s to step up).
Christopher Smart, Chief Global Strategist & Head of the Barings Investment Institute, says:
“Markets are cornering central banks into this new round of cuts. The ECB really had very little choice today and the Fed’s next cuts are more or less pre-determined, too.
“Does it help? Of course, it helps. Is it enough? Almost certainly not. The real drag on economic growth comes from a natural slowing at this stage in the cycle and uncertainty over trade.
“The cycle could easily be extended with a meaningful fiscal response. Germany and South Korea have leeway to spend more, and at current low interest rates even the United States could borrow and invest more.
“As for trade, tariff risks mean that companies don’t know where they should build their next plants or how to organize their supply chains. A narrower deal like the one Beijing seems to be talking about today may help avoid the next round of tariff hikes, but it won’t address the fundamental uncertainty that delays capital spending.”
One of the most complicated parts of the ECB’s stimulus is the changes to its TLTRO programme -- cheap long-term loans for commercial banks.One of the most complicated parts of the ECB’s stimulus is the changes to its TLTRO programme -- cheap long-term loans for commercial banks.
Fortunately Tom Kinmonth, fixed income strategist at ABN Amro, has analysed the changes, and concluded that they are rather more attractive for commercial banks.Fortunately Tom Kinmonth, fixed income strategist at ABN Amro, has analysed the changes, and concluded that they are rather more attractive for commercial banks.
He told clients (in a note online here):He told clients (in a note online here):
Banks can now borrow at a far better rate from the ECBBanks can now borrow at a far better rate from the ECB
TLTRO conditions greatly improved, allowing all eurozone banks to benefitTLTRO conditions greatly improved, allowing all eurozone banks to benefit
The new tiering system offers €2bn of savings for eurozone banks…The new tiering system offers €2bn of savings for eurozone banks…
…and some periphery banks will receive 0% on all their deposits…and some periphery banks will receive 0% on all their deposits
Kinmonth explains:Kinmonth explains:
Under TLTRO III, banks can soon take loans from the ECB for three years at a rate as low of -0.5%, if they meet specific loan lending criteria. The ECB will pay banks to take money. The new modalities are considerably better than the originally planned conditions which were 2 years at +0.1%...Under TLTRO III, banks can soon take loans from the ECB for three years at a rate as low of -0.5%, if they meet specific loan lending criteria. The ECB will pay banks to take money. The new modalities are considerably better than the originally planned conditions which were 2 years at +0.1%...
That means banks are getting some protection, to make up for the pain of negative rates for leaving cash at the ECB:That means banks are getting some protection, to make up for the pain of negative rates for leaving cash at the ECB:
Under the original rules of the TLTRO III programme hardly banks would have stood to significantly benefit when considering the current market conditions. Whereas, under the new programme’s conditions every bank in Europe stands to benefit in regard to funding costs.Under the original rules of the TLTRO III programme hardly banks would have stood to significantly benefit when considering the current market conditions. Whereas, under the new programme’s conditions every bank in Europe stands to benefit in regard to funding costs.
As such, the change today in the modalities of thus ECB programme is a credit positive for the European banking sector. Banks will breathe a sigh of relief on this matter.As such, the change today in the modalities of thus ECB programme is a credit positive for the European banking sector. Banks will breathe a sigh of relief on this matter.
The ECB has now uploaded Mario Draghi’s statement, online here.The ECB has now uploaded Mario Draghi’s statement, online here.
It explains the decision to relaunch its QE programme, hit banks with more negative deposit rates for leaving cash at the ECB, and make a more dovish commitment to leave borrowing costs low.It explains the decision to relaunch its QE programme, hit banks with more negative deposit rates for leaving cash at the ECB, and make a more dovish commitment to leave borrowing costs low.
It includes with Draghi’s usual demand for structural reforms, and increased higher government spending where possible:It includes with Draghi’s usual demand for structural reforms, and increased higher government spending where possible:
In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner.In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner.
Melanie Baker, senior economist at Royal London Asset Management, believes the ECB’s package (a rate cut, more QE and sweetened loans for banks) will boost Europe’s economy.Melanie Baker, senior economist at Royal London Asset Management, believes the ECB’s package (a rate cut, more QE and sweetened loans for banks) will boost Europe’s economy.
She writes:She writes:
“The easing measures from the ECB today were welcome news for global growth prospects. By going for a package, rather than piecemeal measures, and a more open-ended form of QE, there is a better chance that there will ultimately be a visible positive impact on the euro area economy, both in terms of growth and inflation outcomes.“The easing measures from the ECB today were welcome news for global growth prospects. By going for a package, rather than piecemeal measures, and a more open-ended form of QE, there is a better chance that there will ultimately be a visible positive impact on the euro area economy, both in terms of growth and inflation outcomes.
But, policymakers such as Mario Draghi are fighting the damage caused by Donald Trump’s trade wars:But, policymakers such as Mario Draghi are fighting the damage caused by Donald Trump’s trade wars:
In general, we still see the global outlook as something of a tug-of-war between stimulus and trade tensions. More fiscal stimulus would help, as will a likely Fed rate cut next week. But higher tariffs, persistent trade tensions and high levels of trade-related uncertainty for businesses remain key concerns.”In general, we still see the global outlook as something of a tug-of-war between stimulus and trade tensions. More fiscal stimulus would help, as will a likely Fed rate cut next week. But higher tariffs, persistent trade tensions and high levels of trade-related uncertainty for businesses remain key concerns.”
The decision to restart the ECB’s stimulus programme shows Europe’s economy is deteriorating, says Ediz Fahri, senior economist at data firm Dun & Bradstreet.The decision to restart the ECB’s stimulus programme shows Europe’s economy is deteriorating, says Ediz Fahri, senior economist at data firm Dun & Bradstreet.
The ECB has just announced its decision to restart its asset purchase programme (APP) this November, in which €20bn of bonds are set to be purchased each month.The ECB has just announced its decision to restart its asset purchase programme (APP) this November, in which €20bn of bonds are set to be purchased each month.
Meanwhile, Mario Draghi’s decision to lower the deposit rate for the first time since March 2016, signals towards the ECB’s efforts to kickstart the euro area’s growth engine and bring inflation back closer to the 2.0% target.Meanwhile, Mario Draghi’s decision to lower the deposit rate for the first time since March 2016, signals towards the ECB’s efforts to kickstart the euro area’s growth engine and bring inflation back closer to the 2.0% target.
The euro zone’s latest monetary decisions highlights the rising macroeconomic and political risks across the region and affirms our most recent global economic outlook trend downgrade, shifting from ‘stable’ to ‘deteriorating’ in September.The euro zone’s latest monetary decisions highlights the rising macroeconomic and political risks across the region and affirms our most recent global economic outlook trend downgrade, shifting from ‘stable’ to ‘deteriorating’ in September.
Mario Draghi was correct to call for more eurozone government spending, argues Ken Wattret, chief European economist at IHS Markit.Mario Draghi was correct to call for more eurozone government spending, argues Ken Wattret, chief European economist at IHS Markit.
But the call may not be needed until Europe’s economy is in real trouble, he fears....But the call may not be needed until Europe’s economy is in real trouble, he fears....
The need for fiscal policy to complement monetary policy accommodation again featured more prominently [at today’s ECB press conference].The need for fiscal policy to complement monetary policy accommodation again featured more prominently [at today’s ECB press conference].
Draghi called for “effective, timely” action from member states which have fiscal space. Christine Lagarde is on the same page clearly. The likelihood of fiscal stimulus is clearly increasing, including from Germany, which is already in recession (bar the confirmation from Q3 GDP).Draghi called for “effective, timely” action from member states which have fiscal space. Christine Lagarde is on the same page clearly. The likelihood of fiscal stimulus is clearly increasing, including from Germany, which is already in recession (bar the confirmation from Q3 GDP).
But in time honoured fashion, the government in Germany is going to wait until the situation has deteriorated even further before taking action and even then, the timeline is likely to be elongated.But in time honoured fashion, the government in Germany is going to wait until the situation has deteriorated even further before taking action and even then, the timeline is likely to be elongated.
My colleague Richard Partington has filed a news story, explaining what the ECB has done today, and why:My colleague Richard Partington has filed a news story, explaining what the ECB has done today, and why:
The European Central Bank has announced a fresh stimulus package in an attempt to prevent the fragile eurozone economy from grinding to a halt, with an interest rate cut and plans to pump €20bn (£19bn) a month into the financial markets.The European Central Bank has announced a fresh stimulus package in an attempt to prevent the fragile eurozone economy from grinding to a halt, with an interest rate cut and plans to pump €20bn (£19bn) a month into the financial markets.
In one of the final acts of Mario Draghi’s presidency before Christine Lagardetakes charge of the ECB in November, the central bank said it would reboot its quantitative easing (QE) programme of bond-buying programme in that same month.In one of the final acts of Mario Draghi’s presidency before Christine Lagardetakes charge of the ECB in November, the central bank said it would reboot its quantitative easing (QE) programme of bond-buying programme in that same month.
The ECB will also cut its deposit rate – the interest paid to commercial banks when they place funds with the central bank – by 0.1 percentage points to a new all-time low of -0.5%, meaning banks incur charges on any balances they keep there. Negative interest rates are meant to encourage banks to lend to consumers and businesses, rather than park their money with the ECB.The ECB will also cut its deposit rate – the interest paid to commercial banks when they place funds with the central bank – by 0.1 percentage points to a new all-time low of -0.5%, meaning banks incur charges on any balances they keep there. Negative interest rates are meant to encourage banks to lend to consumers and businesses, rather than park their money with the ECB.
The stimulus package comes as the eurozone economy falters alongside a broader global economic slowdown that has been triggered by rising trade protectionism and the US-China trade war.The stimulus package comes as the eurozone economy falters alongside a broader global economic slowdown that has been triggered by rising trade protectionism and the US-China trade war.
More here:More here:
ECB announces fresh stimulus as eurozone economy faltersECB announces fresh stimulus as eurozone economy falters
ING’s chief economist, Carsten Brzeski, reckons the European Central Bank is getting worried:ING’s chief economist, Carsten Brzeski, reckons the European Central Bank is getting worried:
As expected, the ECB has become more alarmed about the outlook for the economy and inflation. As Draghi said during the press conference, the base case scenario was still a benign scenario as it didn’t include the risk of a no-deal Brexit and trade wars.As expected, the ECB has become more alarmed about the outlook for the economy and inflation. As Draghi said during the press conference, the base case scenario was still a benign scenario as it didn’t include the risk of a no-deal Brexit and trade wars.
Nevertheless, the ECB staff projections presented downward revisions to both growth and inflation (as covered here).”Nevertheless, the ECB staff projections presented downward revisions to both growth and inflation (as covered here).”
Mike Bell, global market strategist at J.P. Morgan Asset Management, believes European leaders should heed Draghi’s advice.Mike Bell, global market strategist at J.P. Morgan Asset Management, believes European leaders should heed Draghi’s advice.
He also thinks the ECB is trying to keep the euro weak - exactly what president Trump is so cross about.He also thinks the ECB is trying to keep the euro weak - exactly what president Trump is so cross about.
Bell says:Bell says:
“The ECB have played their hand and Draghi has gone out with a bang. The ball now rests firmly in the court of those European governments with the fiscal capacity to join in the easing game.“The ECB have played their hand and Draghi has gone out with a bang. The ball now rests firmly in the court of those European governments with the fiscal capacity to join in the easing game.
The ECB have certainly got ahead of the pack in an ambitious effort to keep the currency low in the face of potential further stimulus from foreign central banks.The ECB have certainly got ahead of the pack in an ambitious effort to keep the currency low in the face of potential further stimulus from foreign central banks.
Lukman Otunuga, senior research analyst at FXTM, says Mario Draghi has made one last push to stimulate the eurozone - before he leaves the European Central Bank next month.Lukman Otunuga, senior research analyst at FXTM, says Mario Draghi has made one last push to stimulate the eurozone - before he leaves the European Central Bank next month.
But, he also believes more measure may be required, given the weakness of Europe’s economy.But, he also believes more measure may be required, given the weakness of Europe’s economy.
Although Draghi has done “whatever it takes” before he hands the mantle over to Christine Lagarde, it seems markets are disappointed with the ECB’s actions. Given the concerns revolving around the health of the Eurozone economy, most were expecting Draghi to launch a monetary policy bazooka before his departure.Although Draghi has done “whatever it takes” before he hands the mantle over to Christine Lagarde, it seems markets are disappointed with the ECB’s actions. Given the concerns revolving around the health of the Eurozone economy, most were expecting Draghi to launch a monetary policy bazooka before his departure.
However, the argument for the ECB saving some ammunition in the monetary policy toolbox could be for when economic conditions worsen. It is worth keeping in mind that the Eurozone is not only dealing with developments at home, but risks in the form of Brexit and Trump imposing tariffs on European goods. With the ECB cutting its growth forecasts for 2019 and 2020, there is potential for further easing down the line should global and domestic economic conditions deteriorate further.However, the argument for the ECB saving some ammunition in the monetary policy toolbox could be for when economic conditions worsen. It is worth keeping in mind that the Eurozone is not only dealing with developments at home, but risks in the form of Brexit and Trump imposing tariffs on European goods. With the ECB cutting its growth forecasts for 2019 and 2020, there is potential for further easing down the line should global and domestic economic conditions deteriorate further.
The Euro collapsed like a house of cards following the rate decision with prices crashing towards $1.0930 against the Dollar before later recovering over $1.1000. Further weakness may be on the cards in the near term as investors digest the ECB’s action and prospects of further easing in the future.The Euro collapsed like a house of cards following the rate decision with prices crashing towards $1.0930 against the Dollar before later recovering over $1.1000. Further weakness may be on the cards in the near term as investors digest the ECB’s action and prospects of further easing in the future.
Analyst Arne Petimezas of AFS Group is disappointed that the ECB hasn’t announced a larger package today.Analyst Arne Petimezas of AFS Group is disappointed that the ECB hasn’t announced a larger package today.
Draghi gives member state carte blanche for fiscal pump priming. But there are too few signs of a Euro Area fiscal stimulus package. By itself today's package is a disappointment: fiddling in the margins. Unsurprisingly, ECB staff don't see 2% inflation in the forecast horizon.Draghi gives member state carte blanche for fiscal pump priming. But there are too few signs of a Euro Area fiscal stimulus package. By itself today's package is a disappointment: fiddling in the margins. Unsurprisingly, ECB staff don't see 2% inflation in the forecast horizon.
Ronald Temple, co-head of multi asset at Lazard Asset Management, says Mario Draghi is quite right to call for higher government spending:Ronald Temple, co-head of multi asset at Lazard Asset Management, says Mario Draghi is quite right to call for higher government spending:
“Today the ECB used more of its dwindling ammunition to try to stimulate growth. Draghi rightly emphasized the imperative of fiscal stimulus and structural reforms. Unfortunately, Eurozone governments have failed to deliver on this count for a decade now, in spite of ever lower financing costs.“Today the ECB used more of its dwindling ammunition to try to stimulate growth. Draghi rightly emphasized the imperative of fiscal stimulus and structural reforms. Unfortunately, Eurozone governments have failed to deliver on this count for a decade now, in spite of ever lower financing costs.
The ECB has done its job; now it’s time for the governments to step up.”The ECB has done its job; now it’s time for the governments to step up.”
Never play the Forex, folks.Never play the Forex, folks.
After plunging earlier, the euro has now bounced back and is up around 0.15% against the US dollar today.After plunging earlier, the euro has now bounced back and is up around 0.15% against the US dollar today.
There it is #EURUSD pic.twitter.com/XDbtBmBucqThere it is #EURUSD pic.twitter.com/XDbtBmBucq
Economists are chewing through the technical details of the ECB’s stimulus programme now.Economists are chewing through the technical details of the ECB’s stimulus programme now.
Fred Ducrozet of Pictet Bank reckons some parts are actually ‘less generous’ than first thought, such as the ‘tiering system’ that will protect euro banks from more punishing negative rates.Fred Ducrozet of Pictet Bank reckons some parts are actually ‘less generous’ than first thought, such as the ‘tiering system’ that will protect euro banks from more punishing negative rates.
The @ecb press releases:- QE possible with negative rates in all programmes, including CSPP (https://t.co/LwXZFZBlXO)- 3Y TLTRO-III without 10bp rate premium (https://t.co/FGe5wXIhI0) - Two-tier system with exemptions multiple set at 6x initially (https://t.co/m58boyeLbv)The @ecb press releases:- QE possible with negative rates in all programmes, including CSPP (https://t.co/LwXZFZBlXO)- 3Y TLTRO-III without 10bp rate premium (https://t.co/FGe5wXIhI0) - Two-tier system with exemptions multiple set at 6x initially (https://t.co/m58boyeLbv)
CORRECTION: The new tiering is not a Japanese but a Swiss model! Exemptions multiple will be set at 6x the minimum reserve requirements, to be reviewed over time. Less generous than expected. Initial wording was misleading. https://t.co/utpN4jZivKCORRECTION: The new tiering is not a Japanese but a Swiss model! Exemptions multiple will be set at 6x the minimum reserve requirements, to be reviewed over time. Less generous than expected. Initial wording was misleading. https://t.co/utpN4jZivK
Q: If governments don’t heed your advice to boost spending, will the ECB be forced to resort to helicopter money?Q: If governments don’t heed your advice to boost spending, will the ECB be forced to resort to helicopter money?
Mario Draghi says the governing council hasn’t discussed helicopter money [literally giving cash away to citizens].Mario Draghi says the governing council hasn’t discussed helicopter money [literally giving cash away to citizens].
It could be part of our strategic review in future, he adds (that will be conducted by his successor, Christine Lagarde).It could be part of our strategic review in future, he adds (that will be conducted by his successor, Christine Lagarde).
And Draghi wraps up with another nudge to European politicians, saying:And Draghi wraps up with another nudge to European politicians, saying:
Giving money to people is a fiscal policy task, not a monetary policy task.Giving money to people is a fiscal policy task, not a monetary policy task.
That’s the end of the press conference -- I”ll post a summary and reaction now.That’s the end of the press conference -- I”ll post a summary and reaction now.
Q: What about criticism from politicians and bankers about negative interest rates?Q: What about criticism from politicians and bankers about negative interest rates?
Negative interest rates are a necessity to help us meet our mandate, Mario Draghi replies firmly.Negative interest rates are a necessity to help us meet our mandate, Mario Draghi replies firmly.
He adds that 11 million jobs created in recent years, and insists that German citizens have benefitted from the ECB’s stimulus measures [even though savers have been hit with lower interest rates].He adds that 11 million jobs created in recent years, and insists that German citizens have benefitted from the ECB’s stimulus measures [even though savers have been hit with lower interest rates].
Banks don’t like negative rates, but they won’t cause the collapse of the financial system, the president adds (well that’s a relief!). Banks should focus on improving their own costs, he adds.Banks don’t like negative rates, but they won’t cause the collapse of the financial system, the president adds (well that’s a relief!). Banks should focus on improving their own costs, he adds.
Eurozone bonds prices are surging, as investors react to the ECB’s pledge to buy €20bn of new debt each month.Eurozone bonds prices are surging, as investors react to the ECB’s pledge to buy €20bn of new debt each month.
This has driven yields (or interest rate on the bonds) down.This has driven yields (or interest rate on the bonds) down.
Germany’s 30-year bond is now trading at a negative yield again - meaning Berlin can effectively borrow for free!Germany’s 30-year bond is now trading at a negative yield again - meaning Berlin can effectively borrow for free!
That sounds like the perfect time to boost government spending, despite the German government’s reluctance to run a deficit.That sounds like the perfect time to boost government spending, despite the German government’s reluctance to run a deficit.
Entire German Yield Curve back in negative territory w/German 30y yield now at -0.09% on #ECB QE infinity.Entire German Yield Curve back in negative territory w/German 30y yield now at -0.09% on #ECB QE infinity.