European Central Bank President Mario Draghi's press conference earlier today reiterated a few major themes we have heard over and over again recently. Euro zone inflation remained low, credit growth was weak, unemployment rates are too high, and growth is right around the corner. Some market participants were hoping for the ECB to drop its main interest rate to 0.10% from 0.25%. Instead, the Central Bank held rates steady, sending the Euro up to 1.36 against the US Dollar.
This decision came on the heels of a German Factory Orders report that disappointed in December, falling half a percent from the prior month and missing consensus estimates of a 0.2% increase.
As the US begins to unwind QE it appears as if the ECB has no intention of adding further liquidity to their banking system. Draghi's number one priority remains keeping inflation below, but close to 2%. Currently annual inflation in the Euro zone is estimated at 0.7%.
Stateside I like to remind everyone that Fed tapering of QE does not mean we are out of the QE business. We are just lowering the dosage so the comedown is easier. Japan is aggressively encouraging Yen easing as well. In the face of US and Japanese policy I think the ECB has to be more dovish. However, as we have seen in the past the ECB lacks the power that central banks in the US and Japan have. A good solution would be some sort of lending backstop program from the ECB that would encourage more lending from banks as their balance sheets have finally strengthened.