Heartwood: ECB’s Draghi’s statement on quantitative easing had hawkish ambition
22 June 2018 London
Image: Shutterstock
“Mario Draghi’s statement was a masterstroke, communicating hawkish ambition while simultaneously sounding dovish”, according to Heartwood Investment Management’s Graham Bishop.
Bishop made the comment after The European Central Bank (ECB) announced that they would reduce the amount of money it intends on printing each month to zero by the end of 2018.
According to Graham Bishop, investment director at Heartwood Investment Management, the ECB’s plan on keeping the balance sheet the same was expected by financial markets.
What wasn’t expected, however, was ECB president Mario Draghi’s comment on interest rates, which would be held at zero until the summer of 2019 (just before Draghi’s term as president ends in October).
Monetary policy in Europe is extremely simulative and it is likely to remain so for the foreseeable future, Bishop noted.
The ECB is wary of making a policy error, having in the past hiked rates twice shortly before major economic events, Bishop explained.
The latest insights from Heartwood also revealed that market reaction was lower bond yields, a weaker euro, and a rally in equities.
Bishop said: “While these market moves may not persist indefinitely, the ECB has laid out the future path for monetary policy over the coming year, giving the markets one less thing to worry about, which should be a positive for risk appetite.”
The Federal Reserve (Fed) also announced policy change this week as they increased rates by 25 base points, the second hike this year, Bishop revealed.
After closer analysis from Heartwood, it was suggested that Fed policy is close to neutral. Bishop added that at the same time, the Fed is reducing the size of the balance sheet through quantitative tightening.
Bishop said: “A move into restrictive territory is not the end of the world, but is something to be mindful of. It becomes a problem when policy moves into very restrictive territory. The analogy we are fond of using involves a frog in water. If you put a frog in boiling water, it will jump out. If you put a frog in cold water and then gently heat it up, it will stay there and will ultimately perish.”
He added: “The tipping point is when policy becomes overly restrictive, i.e. the water starts to boil. When that happens with Fed policy, it is debatable, but we don’t think it will be this year, our view is more likely the second half of 2019.”
Bishop made the comment after The European Central Bank (ECB) announced that they would reduce the amount of money it intends on printing each month to zero by the end of 2018.
According to Graham Bishop, investment director at Heartwood Investment Management, the ECB’s plan on keeping the balance sheet the same was expected by financial markets.
What wasn’t expected, however, was ECB president Mario Draghi’s comment on interest rates, which would be held at zero until the summer of 2019 (just before Draghi’s term as president ends in October).
Monetary policy in Europe is extremely simulative and it is likely to remain so for the foreseeable future, Bishop noted.
The ECB is wary of making a policy error, having in the past hiked rates twice shortly before major economic events, Bishop explained.
The latest insights from Heartwood also revealed that market reaction was lower bond yields, a weaker euro, and a rally in equities.
Bishop said: “While these market moves may not persist indefinitely, the ECB has laid out the future path for monetary policy over the coming year, giving the markets one less thing to worry about, which should be a positive for risk appetite.”
The Federal Reserve (Fed) also announced policy change this week as they increased rates by 25 base points, the second hike this year, Bishop revealed.
After closer analysis from Heartwood, it was suggested that Fed policy is close to neutral. Bishop added that at the same time, the Fed is reducing the size of the balance sheet through quantitative tightening.
Bishop said: “A move into restrictive territory is not the end of the world, but is something to be mindful of. It becomes a problem when policy moves into very restrictive territory. The analogy we are fond of using involves a frog in water. If you put a frog in boiling water, it will jump out. If you put a frog in cold water and then gently heat it up, it will stay there and will ultimately perish.”
He added: “The tipping point is when policy becomes overly restrictive, i.e. the water starts to boil. When that happens with Fed policy, it is debatable, but we don’t think it will be this year, our view is more likely the second half of 2019.”
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