The ECB Is Almost Ready To Talk

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Image source: Gordon Bell / Shutterstock.com

What's going on?

The European Central Bank (ECB) strongly suggested on Thursday that in October it will give much-anticipated details concerning the withdrawal of its most extreme policies… and the euro jumped following the news.

What does this mean?

For years, the ECB has been directly buying European bonds as part of an effort to stimulate European economic activity (in short, its existing policies have pushed down interest rates in an effort to encourage more borrowing and, thus, spending; click here for more background). If the ECB scales back its bond purchases, as expected, there will be less downward pressure on interest rates within Europe. And, since investors like to invest in regions that pay them more interest, they have been buying the euro in expectations of interest rates going up.

Why should I care?

For markets: The ECB is wary of letting the euro go up too much.

The ECB President made clear that the ECB views the increasing value of the euro as a threat to improving economic growth and price stability (its key aims). A stronger euro makes it cheaper to import goods into Europe, thus pushing down prices, and makes it more expensive for European firms to export their products abroad. So, the ECB is unlikely to allow interest rates to rise such that they push the value of the euro up too much.

The bigger picture: Pressure is rising on central banks to allow interest rates to rise – but they are proceeding cautiously.

In the past week, the CEOs of both Deutsche Bank and Goldman Sachs have warned that low interest rates (globally) are encouraging investors to invest too much money in “riskier” investments (like stocks or bonds of heavily indebted companies). The ECB President and a key US central bank official, however, argued this week that this isn’t occurring. Both central banks appear determined to withdraw their support for their economies slowly despite some concerns that their policies are encouraging investors to take too much risk.

Originally posted as part of the Finimize daily email.

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