As Parting Gift Draghi Leaves Europe With QEternity, Never Hiking Rates Once In 8 Years

After Mario Draghi restarted QE, cut rates and unveiled QEternity last month as his parting gift – and welcome present for Christine Lagarde – there were few surprises this morning from Draghi’s final appearance as ECB president.

The central bank kept all three rates unchanged as expected, noting, as before, that it “expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon.” The ECB also reiterated the parameters of its restarted QE, which it expects to “run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates”, in other words, QEternity.

In short no surprises, and perhaps the only thing that matters, as DB’s Jim Reid notes, is what color tie Draghi tie will be during his press conference.

Meanwhile, as Bloomberg notes, unlike his predecessors, Draghi was never able to raise rates during his term, instead pumping ever-more liquidity into the financial system as he fought one crisis after another. He’ll be remembered for his pledge to do “whatever it takes” to save the euro during the regional debt meltdown in 2012, and he claims credit for the creation of 11 million jobs since 2013, but he’s fallen short of his primary mandate.

Here is the full press release:

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

As decided at the last Governing Council meeting in September, net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

For those who just can’t get enough of Draghi, here is Jim Reid’s poreview of “President Mario Draghi’s last Governing Council meeting before Christine Lagarde takes over on 1 November.”

His final choice of tie colour will be of great interest to all. Maybe it will be a novelty bow-tie. Over his 8 years in charge, the Euro Area has emerged from its sovereign debt crisis and seen unemployment fall to 7.4%, its lowest since May 2008. However, inflation has proved stubbornly difficult to return to target (averaging 1.19% over the period), standing at just +0.8% in September, while five-year forward five-year inflation swaps stand at just 1.202%, so not exactly a vote of confidence from the markets that they expect the ECB to get inflation back up again anytime soon.

Although Draghi’s term has another week to go we thought we’d mark his last press conference with a look at the performance of our usual sweep of key global assets under his 8 year tenure. For a start the euro has weakened by -18.8% against the dollar since November 1st 2011 which likely reflects the relative shifts in monetary policy and growth over the period. The Stoxx 600 (c.121% local, 79% dollar adjusted) has lagged the top global performers namely the NASDAQ (+244%), Nikkei (198%) and S&P 500 (191%). Interestingly the best performing Euro-area sovereign is actually the BTP market (+77%) helped by the “whatever it takes” mantra and endless QE. Even though Bunds have seen yields collapse deep into negative territory, 10 years were already as low as 1.77% at the start of his reign so the 26% return (2% in dollar terms) is not actually that spectacular and is only slightly higher than Treasuries (19%). I wonder what bunds will return under Lagarde’s leadership. My not too controversial guess is that it will be a negative number.

In terms of what to look out for today, no policy change is expected after the easing package released in September, and DB’s Mark Wall wrote in his Friday preview (link here ) that he expects Draghi “to urge policy patience, Council unity and the unburdening of monetary policy with fiscal policy.” Instead, he sees a final 10bp cut to the deposit facility rate at Lagarde’s first meeting in December.