Jan 26, 2019

The end of quantitative tightening

Mario Draghi, president of the European Central Bank. Photo: Daniel Roland/AFP via Getty Images

Both the European Central Bank and the Bank of Japan were expected to begin normalizing monetary policy in 2019 — reintroducing interest rates that are not at or below zero. However, it looks like both will fail and may even go in reverse, potentially adding to their stimulus programs that have so far totaled more than $2.5 trillion and $3.5 trillion, respectively.

The big picture: With China announcing new stimulus measures and the Federal Reserve on pause, the quantitative tightening theme that was supposed to reshape markets in 2019 – draining liquidity from the global financial system, shaking stock prices and popping asset bubbles – may already have come and gone.

  • ECB president Mario Draghi spoke Thursday, announcing no changes to the bank's policy stance. The Bank of Japan on Wednesday lowered its growth and inflation forecasts and announced it would keep its negative interest rate policy and stimulus program intact.

Draghi recently pointed to weak growth across the euro zone that has continued to deteriorate.

What they're saying: FXStreet senior analyst Joseph Trevisani notes that a January measure of euro zone business sentiment and activity and a separate survey on the services sector both showed readings on the verge of contraction. 

  • Annual industrial production fell to -3.3% in November and is expected to have fallen further in December. The industrial sentiment index has declined from 9.7 in January to 1.1 in December.

As for Japan, a recent Bloomberg survey found 72% of economists think the BOJ will not raise interest rates at all this year and 79% don't believe it has the tools needed to fight a recession.

"The U.S. central bank has been raising rates for three years and ... they are at least sitting on a modest cushion if a recession occurs this year or next," Trevisani said in an interview. "The European Central Bank and the Bank of Japan have a bare plank."

The bottom line: Acknowledging the risks to growth and the overall economy, Draghi said Thursday the ECB is ready to again do whatever it takes.

  • “I don’t want to speculate about what contingency would call for a specific instrument, but if you look at the number of instruments we have in place now, we can conclude that it is not true that the ECB has run out of fuel or has run out of instruments."
  • "We have all our toolbox still available."

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