David Roberts

Mario – super once more?

David Roberts

The European Central Bank (ECB) has once again done a superb job of either managing or manipulating markets, depending on one's point of view.

ECB Council members spent most of May telling anyone who would listen that Quantitative Easing was coming to an end. Rates markets moved a little lower: it seemed to come as a shock to many that a relationship with Mario Draghi was more a co-habitation rather than a marriage for life. Mario looked to have packed his bags and taken his CDs with him (or perhaps more 21st century, made sure the Netflix account was in his name).

But as happens with many a separation, it appeared the grass was not as green on the other side as he had thought. Kiss, make up and never speak of it again – or at least promise to hang around until next summer.

So, the ECB has said it will wean us all off QE and bond purchases are due to end by December. However, there is a perceived promise not to raise interest rates at least until September 2019 and that, clearly, is madness.

Incoming inflation data, supported by ECB staff forecasts, already points to inflation moving close to 2% by mid-2019. Wage and employment data are through the proverbial roof and retail sales are holding up nicely. Moreover, Draghi's statement led the Euro and bond yields lower, which means yet more pro-inflationary potential.

We have had 10 years of emergency policy measures. The ECB has tried all kinds of things to stimulate the economy, and growth and inflation are now much stronger than a few years ago. Yet never during that period has the ECB seen fit to categorically rule out raising rates for a specific period of time.

Draghi is making an incredibly brave call. At a time when the ECB is reducing the stimulus it provides via a tapering and removal of QE, the central bankers have told the market that almost no matter what happens, rates will not move for a year. Quite frankly, that is astonishing, unless Super Mario has a crystal ball.

If the eurozone recovery continues, even at its current modest pace, buying short-dated bonds and selling longer seems an absolute slam dunk: and this from someone who hates the short end of the market.

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Tuesday, June 19, 2018, 3:35 PM