By Adam Johnson Jun 3, 2014 10:51 AM GMT-0400 Negative interest rates - the ECB's new 'big bazooka'? Two ghosts are haunting the eurozone: low inflation and a strong euro. The European Central Bank (ECB) is likely to take aim at both by punishing banks that park money with the ECB. The ECB will announce its latest interest rate policy Thursday at 7:45 a.m. ET, and economists tracked by Bloomberg are forecasting a bombshell announcement: Negative deposit rates. As the Euro-area economy contracts, the ECB wrestles with following through on President Mario Draghi's July 2012 promise to "do whatever it takes." Lowering the ECB deposit rate below zero would effectively penalize banks for parking money, presumably sending a signal to Europe's bankers they need to make loans and support growth. Again, this is significant and it's one of several unconventional policies being discussed. Mr. Draghi will hold a press conference at 8:30 a.m. ET to discuss his decision. To say he will receive a battery of questions is an understatement. Negative interest rates are virtually unprecedented since World War II. http://www.bloomberg.com/news/2014-...w-low-will-the-european-central-bank-go-.html
This is how the media has been "gaming" it for weeks now. From most to least likely. 1)Negative reserve deposit rates 2)ECB's taget rate .75% lowered. 3)LTRO 4)QE Action along with another "do whatever it takes" expected. This weeks .5% inflation print (.6 r .7%) expectd was a negative surprise a s last months .5% Interesting stuff but far from a bazooka. Can the ECB legally do QE? I thought not.
ECB's target rate lowered 75bps? How is that gonna work? And yes, ECB can legally do QE, at least in theory.
I recall reading that the German courts said Germany couldn't participate in QE? Has that changed? If Germany doesn't participate then who funds QE in Europe - Belgium again?
Das Bunderverfassungsgericht (German Constitutional Court) didn't rule that Germany couldn't participate in QE. They sorta said that they have some issues with the various aspects of the OMT program (which is different to monetary policy QE that the ECB is talking about now), but mostly punted the questions over to the European Court of Justice. Since the ECJ is extremely unlikely to rule on things in a way that endangers the European project, it's effectively a green light for the ECB to do whatever they feel is necessary.
Two key points to watch going forward: 1) whether Draghi is targeting 120 on the Euro index (that's a long way but consider point #2) 2) the debt levels are growing faster than the economies themselves, if this persists into year end even with QE, LTRO or negative rates, I think something very, very bad will happen - like Gozer bad
The central bankers are showing how desperate they are about the economy. So what will markets do? Scream higher, of course.