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Suddenly, central banks fall like dominoes. The two largest central bankers in the world have abandoned their old reserve and are now more or less openly discussing monetary policy and easing monetary policy after several others have led the way.
The President of the European Central Bank, Mario Draghi, who has been discussing for months how the ECB would raise rates in several months. Last week, not only postponed the date of any increase, but did not rule out that the next decision is to cut rates. Mr Draghi added that at the meeting of the Governing Council to be held in the Lithuanian capital of Vilnius, some politicians are talking about the resumption of asset purchases in housing known as easing. quantitative.
For the moment, the ECB has continued by announcing long-term refinancing operations, or TLTROs, intended to inject liquidity into the banking system. The conditions were generous, guaranteeing that many banks, especially in the southern euro-zone countries, would take the loans.
Draghi's silent return to his dovish roots followed the more dramatic overthrow of Federal Reserve Chairman Jerome Powell, who hijacked Wednesday what was supposed to be a quiet examination of the Fed's monetary policy management. The Fed was ready to "do the right thing" in the face of new risks associated with prolonged trade tensions. The markets correctly interpreted the term "appropriate" to mean a rate cut, indicating that Powell was willing to give up his patient position if necessary to counteract the moderating effects of tariffs on economic growth.
As if to underline the risk, the labor market data released on Friday indicated 75,000 jobs, well below the robust numbers of the hundreds of thousands of new jobs posted in recent months.
The reversal of Powell and Draghi's policy comes as central banks reduce benchmark rates last week, after a month of May in which a series of emerging markets lowered rates.
Powell's pivot ensured that Draghi's dovish tones would have little impact, as investors felt the impact of the US rate cut was greater. In addition, most analysts agree that imminence is imminent, given the more direct impact of the trade war on the US economy. In addition, the Fed has much more room for maneuver. Its benchmark rate is currently 2.25-2.50, while that of the ECB is already at zero.
In fact, the euro rose as a result of the ECB meeting, crossing the 1.13 barrier against the dollar.
The ECB plunged into negative territory with its -0.4% rate on bank reserves and could do the same with its benchmark. A recovery in asset purchases could be an easier path. Draghi said the ECB was ready to use "all the tools in the toolbox".
Draghi said the bank would not consider raising rates until mid-2020, six months later than previously expected. When asked if the next rate step would inevitably be a rise, he answered "No".
The surprise in all this is that Draghi, who seemed happy to retire with the ECB in autopilot, is now considering a new policy of easing and has already tied the hands of his successor with forward guidance promising no rise before mid-2020.
This does not seem to be the case of Bundesbank President Jens Weidmann, a vocal hawk who has publicly opposed many of Draghi's policies. The advent of Weidmann would be perceived as a break with the path drawn by Draghi. The president of the French central bank, François Villeroy de Galhau, would seem a smoother transition and he is conducting estate inquiries.
The problem is that a Frenchman, Jean-Claude Trichet, has already served as president for eight years, while Germany has not yet secured the post. It is also an obstacle for Benoît Coeuré, a member of the executive council that everyone loves, but who faces the additional obstacle of a rule preventing a member of the board of directors from being reappointed.
This is why two Finns, Olli Rehn and Erkki Liikanen, respectively current and outgoing governors of the central bank, hope to succeed as compromise candidates. The problem, in the EU's convoluted process of job allocation, is that if Margrethe Vestager of Denmark becomes president of the European Commission, it would be difficult to name another Scandinavian at the ECB. We can not forget the highly developed French country self-love and the meaning of rights for one of the most important posts of the EU.
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