The concept of a the central bank handing out money to citizens seems inconceivable, but when there’s a will, there might a way, especially as government seem incompetent at creating any kind of growth.
Throwing money at the problem in this type of manner is still quite improbable, but the mere talk of it, even if it is in the form of denial, could help push the exchange rate lower and help the ECB achieve its elusive inflation goal.
The European Central Bank is not expected to make any policy announcements in its April meeting: it introduced a huge stimulus package back in March: a 33% raise in the amount of monthly buys to €80 billion per month, a cut of the deposit rate to -0.40%, a surprising cut of the main lending rate to 0% and 4 new TLTROs, a measure that has not been implemented yet.
The move only temporarily hit the euro and the tables turned swiftly once Draghi said they are done with rate cuts for now. The stronger exchange rate against the US dollar and the Chinese yuan is frustrating for the ECB: a weaker euro is needed for making euro-area exports more attractive as well as raising prices of imported goods. Draghi and co. are constantly missing on their inflation target: headline inflation is at a round 0% and there’s little comfort in core inflation, which is only at 1%.
So, with Draghi saying they are done for now, the TLTROs still awaiting implementation and no new forecasts, what can he do?
Talk.
Here are some talking points:
- Re-open the door to cuts: This was already hinted in the meeting minutes – we learned there was a discussion of deeper cuts and that at the current situation, the deposit rate is not at the lower bound. But will markets take him for his word? More cuts and more talk of cuts already have a diminishing effect?
- Warn about the exchange rate: While the ECB does not have an exchange rate target, Draghi has been able to talk down the euro directly, including explaining why monetary policy divergence implies a weaker EUR/USD.
- Call on governments to do more: The ECB is raising the rhetoric in this direction, but it seems that nobody is listening. Monetary stimulus cannot do all the work and the ECB wants fiscal stimulus – wants governments to spend. Even if Draghi becomes more explicit, his words may be ignored once again.
- Hints of helicopters: In the last meeting, Draghi responded to a question about helicopter money by saying it is not really on the cards, but he did not totally rule it out. He could say that there was a discussion about it. This could already have a bigger impact. Giving consumers money to spend serves as fiscal stimulus, circumventing governments. The problem is not only the replacement of governments but also the perceived danger of inflation and the violation of treaties. However, we learned that the ECB makes the rules as it goes, and if there’s a will, there’s a way. The German Constitutional Court is not quick in general, and not quick to strike down ECB policy.
The mention of a discussion about helicopter money, even if it isn’t likely to materialize anytime soon, could already have a bigger impact on the euro. This is a much more direct way to flood markets with euros and devalue the currency.
Will he show us the helicopters? It could push the euro down.
If Draghi does not attempt this verbal exercise, it is hard to see the euro moving down and it could continue its cautious grind to the upside.
Lines to watch: On the upside, EUR/USD faces 1.1410, 1.1460, 1.15, 1.1612 and 1.1712. On the downside, we have 1.1335, 1.1250, 1.1215, 1.1150 and 1.1070.
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