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More than six weeks after the governing council of the European Central Bank has met in Frankfurt, the ECB has finally published the minutes of the meeting which paved the way for a disappointing action from the ECB. The expectations before the meeting and monthly decisions were set very high, and the market was clearly disappointed with a deposit rate cut that was just 0.10%, resulting in a new deposit rate of -0.30%.
This failed to earn the trust and credibility from the financial markets, as Mr Market was expecting a much stronger answer from the ECB, and it’s now looking like the European Central Bank will have no other choice but to announce even more measures at the upcoming meeting, scheduled for Thursday.
Back in December, several members of the governing council were already putting a more severe deposit rate cut on the table and would have preferred a new deposit rate of -0.40%, and it looks like the council was preferring to ‘play it safe’ and acted with a solution that was ‘too little, too late’. The pressure on the council has been mounting ever since, and here at Secular Investor we are expecting the ECB to cut the deposit rates once again.
First of all, it’s pretty clear the ‘soft solution’ from the December meeting didn’t work as planned at all. Not only did the market shrug the new measure off, it also was absolutely disappointed by this non-event, considering several leaks from the ECB’s headquarters were pointing in the direction of more aggressive measures.
Source: ec.europa.eu
Secondly, another 0.10% deposit rate cut will probably once again be too little, too late right now. In the past two months we have seen a total collapse of the Brent oil price (see later), which makes the ECB’s inflation targets to move further away than ever before, almost getting to an ‘unreachable’ status. Indeed, whereas the ECB is considering an inflation rate of 2% to be ‘a healthy optimal point’, the inflation in the Eurozone won’t even reach the 0.2% rate given the most recent expectations.
Source: ec.europa.eu
Indeed, the energy prices are continuing to decrease and are pushing down the total inflation rate. Keep in mind the expectations for December are still more optimistic than what we are expecting for January, as the lower energy prices will increase the pressure on the inflation numbers. Let’s have a look at the Brent oil price in the past 3 months.
Source: stockcharts.com
So the 0.2% inflation number is based on the relatively benign weakness of the oil price, but as you can see, the oil price decrease has accelerated in January, which might push the total inflation rate back to zero. That’s obviously not really what the ECB is aiming for, and more swift action will be necessary to avoid a prolonged period of deflation in the Eurozone.
Based on these reasons, the ECB has no other option but to step up its game again at the next meeting and will now really have to get the bazooka from the secured storage facility, because the current fly whisk isn’t doing any good.
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