During Draghi’s tenure as ECB president, he never got the chance to deliver tighter policy and how ironic is it that his name is in the headlines today once again – but for very different reasons. A reminder that Draghi only took over as ECB president in November 2011, after the central bank began to cut rates; less than six months after their last rate hike at the time.
In any case, the ECB is once again in the spotlight today as they are set to raise interest rates for the first time in over 4,000 days. As grand as the occasion is, I’m afraid that the gesture is the only relevance of the decision today.
It doesn’t quite matter all too much how much the ECB chooses to hike – be it 25 bps or 50 bps – because at the end of the day, it won’t convince the big picture outlook that Europe is staring down the barrel of a gun and the central bank is rather helpless to save the economy.
Inflation pressures are soaring. The Russia-Ukraine conflict continues to weigh on sentiment and squeeze energy and commodity prices. A gas crisis is looming large and the heatwave this summer hasn’t helped one bit. To call the ECB being behind the curve would be an understatement. Coming into today, they are still tied with the BOJ as being the only major central banks not to have adjusted interest rates this year.
For all the talk, it has taken so many months before we will finally see some action today. But that seems to be typical of how things are in Europe when it comes to policy decisions, no?
In any case, the immediate reaction today will be looking towards whether the ECB will hike by 25 bps or 50 bps. The euro will be swung either way as the odds are roughly a coin flip despite estimates siding with the former. But when the dust settles, I reckon it will be hard for the euro to maintain a bullish rhetoric when there is so much else going wrong for the currency from an economic perspective.
This article was written by Justin Low at www.forexlive.com.