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Friction and Drag-hi

Friction and Drag-hi

The ‘Rates Day’ yesterday was an interesting one as far as market movements go, though there were no real surprises the undercurrent and tone of the policy maker’s comments were interesting to be plugged in to.

There were no changes for the interest rates of either the Bank of England or the European Central Bank, but nonetheless there was plenty for markets to latch on to. Heading into the meeting, allegations surrounded Draghi regarding particularly: his management style and the insinuation that he does not necessarily act with the full support of his cabinet at all times, and also the ECB’s propensity to increase their balance sheet in a move that focuses on further easing policy.

It’s a tight spot for the ECB given that they have, for practical purposes, exhausted in the near term the available avenues of further reducing their interest rate and so the options left to provide stimulus to their economy really are centred around increasing their balance sheet with choices such as bond purchase programmes.

Draghi was directly questioned on these matters, and naturally downplayed the former – regarding his management style – saying ‘it’s fairly normal to disagree about things’ and that he had the full backing of his entire team for both his opening statement and also potentially increasing the balance sheet in a targeted EUR 1 billion action plan perhaps based on broader bond buying. I think that we will look to December to see the beginning of this type of action from them.

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