ECB Policy Shift

Like a parent hoping to remove training wheels from their child’s bicycle, European Central Bank (ECB) President, Mario Draghi, unexpectedly dropped his pledge to escalate bond buying in the event the European economy were to deteriorate. At the same time, the ECB upgraded its economic outlook for the region.

Investors, surprised by the shift, pushed the euro and interest rates higher. The common currency climbed by half a cent versus most currencies and German 10-year bund yields spiked to 0.70 per cent from 0.66 per cent before the news.

Central banks have played a pivotal role in the financial markets over the last decade. Notwithstanding the Federal Reserve’s policy shift last year, central banks, including the ECB, Bank of Japan and the Fed, collectively hold nearly $15 trillion in securities. Over the last 12 months, central banks have injected more than $2 trillion in the global financial system.

President Draghi emphasized ECB plans to keep its €30 billion ($37 billion) monthly purchase program in place until at least September. While the ECB’s policy tilt is minor on the surface, a meaningful shift in central bank policy will eventually create an important impact on markets that have become accustomed to the liquidity largess.

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