Published: Sun, January 22, 2017
Economy | By Melissa Porter

Banks gain on hawkish Fed, ECB meets

Banks gain on hawkish Fed, ECB meets

In the letter, Draghi reiterated that the imbalances were due to the ECB's own bond buying-program, where numerous sellers are foreign investors with accounts in Germany, and ensuing portfolio rebalancing.

While rates were left unchanged, as expected, volatility was expected to increase as Draghi carried out his press conference.

Inflation has jumped to 1.1 percent in December in the eurozone, but that was mainly due to an increase in fuel prices, not underlying demand for goods.

The mass bond-buying programme is already scheduled to slow from 80 billion to 60 billion euros per month from April. However, Draghi did sound a fair bit more dovish than we thought possible given the recent data, which has pointed to a positive uplift in Eurozone growth and inflation.

Investors are most interested, however, in his plans for fiscal stimulus, which could boost inflation and cause the Federal Reserve to hike interest rates faster than now expected. As for currencies, Draghi pointed to the worldwide consensus, as expressed in statements by the Group of 20, against competitive devaluation.

However, Draghi said any rise in inflation would have to occur over the medium term, be durable and self-sustaining, and be able to continue without extraordinary policy support - implying this is not the case at the moment. The ombudsman will also look into the "involvement of senior European Central Bank people in the work of the G30", according to the letter sent to Draghi by the ombudsman, Emily O' Reilly.

"It has to be a durable convergence, it can not be transient", he said.

Meanwhile on the other coast of the Atlantic, the Federal Reserve (Fed) prepares for a hawkish monetary policy, as the United States economy is approaching the full employment and price targets, according to the Fed Chair Janet Yellen.

At the same time, inflation has been diverging between countries, with year-on-year prices rising 1.7% in Germany and only 0.5% in Italy. Last but not least, we suspect that the FX markets are still to fully price in the risk of USA protectionism, which should weigh on global risk sentiment, trade and growth.

In the Eurozone as a whole, the inflation rate almost doubled from 0.6 to 1.1 per cent.

Mr. Draghi said policy makers hadn't discussed a reduction in planned stimulus, although he acknowledged that will happen some day.

"I am pretty sure that it will come the time, (and) then we will have to have a very deep, very careful discussion and analysis of the situation".

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