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Tensions grow ahead of ECB rate decision

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Tensions grow ahead of ECB rate decision

An overwhelming sense of uncertainty characterizes the market ahead of Thursday’s ECB rate decision and monetary policy announcement. European Central Bank President Mario Draghi will be tasked with holding volatility at bay, as investors look to developments on the other side of the Atlantic for clues about what the ECB might do next. Although the market expects the ECB to uphold its easy-money policy on Thursday, the US Fed’s latest announcement calling for QE tapering has heightened expectations that the ECB could soon boost interest rates However, when we break down the fundamentals and compare the US and Eurozone economies, we find that the ECB has no support for such drastic measures.

The 17-nation currency bloc is still faced with high unemployment and low inflation, making higher interest rates at this moment anathema to economic recovery. While investors know this, they are still troubled by what monetary instruments the ECB might deploy to resolve the Eurozone’s deepening woes. One of those instruments is forward guidance, a tool used by the Fed to guide the market toward future interest rate targets. Incoming Bank of England Governor Mark Carney will carefully weigh this option in his quest to ease volatility in the UK economy.

The key takeaway from Draghi’s announcement will be whether the ECB is more willing to exit from its loose monetary stance now than it was a month ago. The Eurozone is experiencing mild recovery, but signs that imminent policy shifts are looming are far-fetched. Mild recovery should give the ECB some breathing room as it mulls over the future of its monetary options. Comparisons with the US Fed and Bank of England are natural, but the ECB does not share the same fundamentals. However, what the ECB needs is a detailed action plan about where its monetary policy is headed. The Fed already outlined its plan in detail. Mark Carney is expected to provide long-term policy commitments in August. Draghi isn’t expected to lay out such a detailed plan on Thursday, which will only add fuel to the speculative fire that keeps raging in one of the developed world’s most volatile economies.

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