Draghi’s rate-cut plan fails to sway investors

Bloomberg

Mario Draghi’s insistence that he’s determined to revive euro-zone inflation with interest-rate cuts and renewed bond purchases if needed isn’t convincing investors.
The European Central Bank president talked a tough game after policy makers extended their pledge to keep borrowing costs at record lows and announced more cheap loans to banks. Yet traders pared bets on a rate cut, the yield curve for German bonds flattened — a sign of worsening economic prospects — and a market measure of inflation expectations closed near the lowest on record.
While Draghi is using similar tactics to US Federal Reserve Chair Jerome Powell in promising to react to any deterioration in the outlook, the challenge is that he’s seen as having less room for maneuver. ECB rates are still at record lows and the balance sheet hasn’t started to be wound down.
Moreover, he has less than five months left in office and there’s no clear sign who his successor will be, nor whether they’ll have the same commitment to the radical measures that hallmarked the Italian’s eight-year term.
“The market believes Draghi’s take on inflation is wishful thinking,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, which predicts the ECB will cut the deposit rate towards the end of this year and extend its low-rate pledge to mid-2021. “The talk about contingencies is cheap, but to reverse the decline in inflation expectations he will have to walk the walk.”
Draghi’s dovishness echoes moves around the world. Australia this week cut rates for the first time in three years, India eased policy hours before the ECB meeting, and bets are mounting that the Bank of Japan will add stimulus.
Traders in European money markets are now pricing an 80 percent chance of a 10 basis-point rate cut by June next year, compared with expectations before the Governing Council’s meeting for a full cut by March 2020.
In contrast, bets that the Fed will slash borrowing costs this year have risen since Powell signalled this week that he’s open to easier policy as he watches global trade tensions.
Even the ECB’s announcement on the terms of a fresh round of long-term loans to banks failed to have staying power. European bank stocks gave up gains on to close lower.
“‘We are looking at a market reaction that doesn’t really match up,” said Nick Kounis, an economist at ABN Amro NV in Amsterdam who predicts QE will resume in January.