ECB and Stock Market: How Mario Draghi Became a Friend of Investors

09/14/2018

ECB monetary policy pleases stockbrokers
How Mario Draghi became a friend of investors

 

  

DPA

Reluctantly hesitant: ECB President Mario Draghi

The European Central Bank remains on track in its exit from ultra-loose monetary policy. Investors in the financial markets welcome this, although they will soon lack liquidity – why?

   
  At first glance, the situation could be surprising: Two central banks have announced monetary policy restraint this week – and in both cases the financial markets have reacted with satisfaction.

  First, Turkey's central bank raised interest rates by as much as 6.25 percentage points to 24 percent. A move that investors welcomed because it seemed urgently needed in light of the decline in the Turkish lira and the already apparent impact on the country's economy. In addition, the central bankers made clear their independence from the Turkish President Erdogan, who had recently spoken out against higher interest rates. Result: The lira gained after the measure suddenly 5 percent in value.

  

The decision of the European Central Bank (ECB), which was announced a little later on Thursday, is also likely to be of major importance to most investors in this country. The ECB underlined its cautious approach for years: The central bank wants to reduce the volume of its bond purchases from the previous 30 billion euros a month from October to 15 billion euros. However, the bankers around ECB President Mario Draghi continued to put a stop to purchases at the end of this year on the proviso that economic data must then allow this. The ECB also wants to keep rates at a record low of 0 percent until at least the summer of 2019.

  

Lo and behold, the measures taken by the European Central Bank have been well received by investors. Stock prices were boosted, with the euro appreciating against the dollar.

  This reaction could be surprising because it actually contradicts the textbook presentation of the economy. Interest rates up, prices down, and vice versa – that's one of the most frequently quoted rules of thumb. In other words, if central banks open their cash locks, then a good deal of liquidity often lands on the financial market, where it raises prices for equities, bonds and other asset classes. However, central banks turn the money back in return, so is actually the opposite reaction of the markets to expect: so, for example, falling stock prices.

  

At least in theory. That this is not currently the case in practice – although critics have warned years ago of the moment when the ECB is trying to reverse its ultra-loose monetary policy – can be explained with one simple word: trust.

   

© manager magazine 2018

All rights reserved. Duplication only with the permission of manager magazin Verlagsgesellschaft mbH

Leave a Reply

Your email address will not be published. Required fields are marked *