How to read the ECB's monetary policy decisions (part three)

The monetary policy decisions of the European Central Bank (ECB) represent one of the most awaited moments in the economic calendar of traders, as these decisions have a strong impact on financial markets and forex markets, in particular the euro-dollar one. The most awaited decision is certainly the one concerning interest rates, because these traditionally have a more direct and higher impact on currency markets. However, after the 2008 financial crisis, a new monetary policy tool has begun to assume a weight as important as interest rates, if not even greater: monetary easing programmes, also known as Quantitative Easing.

Quantitative Easing programmes consist in the purchase of assets of various types by the central bank, ranging from sovereign bonds to corporate bonds, mainly. The objective of the European Central Bank’s massive purchase of sovereign bonds on secondary markets is to reduce the fragmentation of the sovereign bond markets of the Eurozone countries, particularly between those of Northern Europe and those of Southern Europe, with the former showing historically much lower yields than the latter. The ultimate objective of these programmes is the safeguard of the euro, in a monetary union that does not yet provide for a system of redistribution of funds according to a federalist model. The purchase of these securities, which end up in the assets of the central bank, is paid for by an increase in the money supply, with which the central bank buys the securities on the market. For this reason, Quantitative Easing is to all intents and purposes an expansionary monetary policy manoeuvre.

Overall, a Quantitative Easing programme can be worth hundreds of millions of euros to a few trillion, measured in terms of the total securities purchased. The statements of the meetings of the ECB’s Governing Council always contain all the information relating to the plan and, in particular, the decisions taken on the size of the programme, any increases in purchases, or reductions (tapering), the change in the pace of monthly purchases or the conditions relating to reinvestment programmes for the proceeds of the securities purchased. The official statement always indicates the expiry date of the programme (e.g. June 2021) and the ECB’s intention to extend the deadline if market conditions are not yet satisfactory. All this information is interpreted by traders as ‘hawkish’ (restrictive measures) or ‘dovish’ (expansive measures). Hawkish information are supportive for the euro, while dovish information supportive for the dollar. It certainly takes some experience to understand how monetary policy stance changes within a Quantitative Easing programme. Reading statements already published on the ECB’s website and observing on the chart of the time series the behaviour of the euro-dollar taken immediately after the publication of the documents is certainly a very useful exercise to strengthen this type of expertise.

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