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Markets Don't Buy The Dovish Message Sent By The ECB

Markets Don't Buy The Dovish Message Sent By The ECB
As an initial dovish message by the European Central Bank (ECB) was quickly drowned out by talk of inflation and an end of asset purchases, President Mario Draghi's difficult task of calming markets was laid bare on Thursday afternoon.
Amid speculation that the bank will start to scale back its ultra-loose monetary policy in the fall, the bank had held interest rates and asset purchases steady on Thursday. It also insisted that it would be poised to step in should the outlook take a downward turn and struck a somewhat dovish tone.
"If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the program in terms of size and/or duration," the ECB said in its policy announcement alongside its rate decision.
Albeit gradually, underlying inflation rising in the coming months, was spoken of by the Italian economist. But mentioning that ECB members would debate bond purchases at its September meeting, he also commented on discussions involving the bank's quantitative easing program.
A shift away from years of easy money, where interest rates have been held at 0.00 percent for seventeen consecutive months, will be caused by the improved economic growth in the euro zone. many market participants expect.
After Draghi's comments that these discussions will take place, the euro quickly moved higher. After falling to a session low of nearly 1.148, the single currency rose above 1.55 against the dollar.
Last month, the bank would steam ahead with interest rate hikes and the reduction of its bond-buying program - schemes used to inject cash into the economy, and markets were shaken by hawkish comments from Draghi then. Draghi said that "all the signs now point to a strengthening and broadening recovery in the euro area”, during an ECB Forum in Sintra, Portugal, in June. The bank would need to be "persistent" and "prudent" in adjusting its parameters going forward, he also added.
the unprecedented central bank stimulus which has characterized the last decade since the global financial crisis was seen to be winding down by the market following those comments and that created a mini tantrum in financial markets.
Since then, while the ECB has been careful to temper its comments so as to prevent an unwanted tightening of monetary conditions, in a bid to avoid confusing markets further, it has resisted overtly backtracking on Draghi's comments.
He expected the bank to announce the gradual winding down of its quantitative easing (QE) program on September 7, when policymakers return from summer recess, said UBS's Chief Economist Reinhard Cluse to the TV channel ahead of the announcement.
"We think it's a program that will take six to nine months, so by the summer or late-summer of 2018 that tapering program will be complete. We think interest rate hikes will come as of 2019 but proceed very gradually and in a data-dependent fashion. In the meantime we think the ECB will keep liquidity conditions very easy," Cluse said.
And agreeing that the tapering could be expected at an average pace of $10 billion per meeting, which would enable its completion in the third quarter of next year was Oliver Brennan, senior macro strategist at TS Lombard.

Christopher J. Mitchell

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