Noting uncertainty in the post-Brexit wake and lack of policy options, the European Central Bank (ECB) is likely to hold of it’s expected €1.8 trillion stimulus ($1.98 trillion) until it has a clearer picture of the future.
Mario Draghi, president of the ECB, will likely use his Thursday press conference to reassure domestic and foreign investors of the ECB’s ablity to “bolster the economy again if needed.” Many economists think that the ECB will hold off the stimulus till September, when financial forecasts that factor in the Brexit vote will be released. (RELATED: Trump’s Brexit Blunder)
While the initial financial shock of Brexit may be behind the EU, the entirety of the economic fallout remains largely unclear. The euro has risen rapidly against the pound and European stock markets have, for the most part, recovered, reports the Wall Street Journal.
The post-Brexit chills are still felt in the marketplace. European banks have plunged and Italian banking officials are asking the EU for “over a possible €40 billion ($44 billion) capital injection for the banks.”
The ECB faces a unique challenge because it has already utilized almost every policy in it’s disposal. Since last December, the ECB has implemented the following economic policies. It injected the European economy twice through monetary stimulus, cut interest rates below zero, purchased €80 ($88.2) billion a month in bonds, and launched four-year-loans to banks. Despite these efforts, the inflation rate is far below the ECB’s target.
The next stimulus, as Franck Dixmier, Global Head of Fixed Income at Allianz Global Investors, warns will have to be used “only in exceptional circumstances.”
Europe’s banks are unhappy with the central bank, claiming that the “negative interest rates” it has created “undermine profits and could lead to higher loan costs.”
Economists add their own policy suggestions for the ECB, stating the central bank either “to change its design” or “buying bonds that yield less than its deposit rate.”
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