Boring, meaningless and not entertaining. Those are some descriptions I found on Twitter about the ECB Governing Council meeting and the press conference afterwards. However, I saw a press conference that (of all press conferences) should definitely be in the top 3, if not the first place.
In addition to an important one, in my opinion it was also a unique press conference. Not just because the bank's vice president (Vitor Constancio) was there for the last time, but because it's the first time something the second man said was more important than what the president had to say. In fact, what Constancio said was more important than 90% of what President Mario Draghi has said in all his press conferences.
Looking back on ECB period
As it was his last meeting, Constancio was asked to look back on his ECB period. He did, and in doing so he said something important for the future. His period at the ECB is characterized by the fact that the bank had to use all kinds of unconventional means to tackle the crisis. Think not only of quantitative easing, but also of unlimited financing for the commercial banks and the fact that the bank kept the official interest rate at 0% for a long time.
That unconventional policy was necessary in those abnormal economic times. Now that those times are back to normal, it's time to put those tools away on the face of it, so does the ECB. The bank has reduced the volume of quantitative easing from €80 billion per month to €30 billion and plans to stop completely by the end of this year.
Normalization of policy
The ECB is indeed normalizing monetary policy, but that does not mean that policy will ever return to normal, or at least in the near future (the next 5 years). “Unconventional monetary measures now belong in the monetary toolbox of central banks and can be used again,” Constancio said.
He continues: “I wonder if we can ever go back to the simple monetary policy of before the crisis. The increasing importance of the non-banking part of the financial system means that the spectrum of interest rates has changed. Other instruments may be needed for central banks, which will have to meddle with more interest rates in the medium term.”
Unconventional Resources
What he says is not only that unconventional means can and will be deployed more quickly from now on, but also that new unconventional means are being devised. What matters is that quantitative easing or 0% interest rates will no longer be something new or unknown. Since these measures were unknown and new until recently, the bar for deploying them was fairly high. That bar was already high, because there was quite a bit of legal uncertainty.
Was buying up government and corporate bonds compatible with the Maastricht Treaty? We now know the answer to that. The European Court of Justice ruled that quantitative easing is legal. Unknown makes unloved. This will no longer apply in the future: unconventional monetary policy is anything but unknown.
Opinion of the board
Given his position within the ECB, we can assume that he reflected the opinion of the board. The fact that the ECB has posted the words on its own Twitter account underlines that. Especially since when one of Constantio's colleagues said that the ECB could raise one of its interest rates, the bank issued a press release to make it clear to the outside world that he was not speaking on behalf of the ECB. There was no such message after Constantio's words. In fact, the ECB shared it with the outside world.
ECB will influence financial market
The implications of Constancio's words cannot be underestimated. It means that the central banks, and certainly the ECB, will permanently have a stronger influence on the financial markets. In concrete terms, this could mean that interest rates for all maturities will rise more slowly than before and may no longer reach pre-crisis levels. And if they threaten to climb too fast and/or too far, the bank is ready to intervene.
In other words, the chances of long-term interest rates and EURIBOR returning to previous levels have dwindled. This is especially true for EURIBOR rates. This is because they are highly dependent on the ECB interest rate. Long-term interest rates are also influenced by market expectations about future inflation, for example.
Lower interest rates?
The prospect of structurally lower interest rates is good news for entrepreneurs. However, since an entrepreneur is often also a saver, the same prospect means that savings rates will remain low for a long time to come and saving will become a loss-making activity.