Tomorrow brings the European Central Bank’s March rate decision to markets. No movement on rates is expected, and as has become usual for ECB meetings of recent, the primary drivers will likely emanate from the details and the verbiage offered by Mr. Mario Draghi during the accompanying press conference.
The big question is the prospect of QE-taper. Recent European economic data has been encouraging of late, with Euro-Zone GDP growth currently tracking at an annualized 1.7%, and inflation in the month of February printing above the bank’s 2% target. With the ECB’s QE program set to scale-down at the end of March, the bank will be buying €60 Billion worth of bonds each month until the end of this year. Investors have already begun to look around the corner in the effort of seeing what the ECB may do next: Whether they’ll let the program run its course at which point the ECB will no longer be feeding liquidity to markets, or whether the bank will look for some type of alternate program or replacement strategy (similar to the Federal Reserve enacting ‘Operation Twist’).
Likely – Mario Draghi will try to straddle the line tomorrow without eliciting too much volatility on either side of the discussion. The prospect of a ‘taper tantrum’ could drive strength into the Euro, obviating some of the recent benefits of the bank’s outsized QE-program, and this could further complicate the Euro-Zone economy’s almost decade-long struggle with lagging growth. Also given the fact that Dutch elections take place next week (March 15 – Fed day), French elections are taking place in April and then German elections in August – and this may not be the best time to rock the boat by introducing new strategies or ideas.
Nonetheless, fully expect market participants to grab on to any potential comment that may allude to what the ECB is looking to do next. Markets getting even an inch of innuendo about a potential taper could drive that into a mile’s worth of volatility. For all of their efforts, European QE did little to actually weaken the Euro, as much of the move came-in before the ECB program had actually begun to buy bonds.
