Must-read: Wolfgang Munchau: “European Central Bank Must Be Much Bolder”

Must-Read: Wolfgang Munchau: European Central Bank Must Be Much Bolder: “The European Central Bank’s monetary policy has been off-track for a very long time…

…And lately, the [core inflation] rate has fallen again. Is there something the ECB can do?… The ECB should hold an open debate about policy alternatives, starting with a realisation that quantitative easing has failed. The ECB acted late, and did not do enough…. The programmes in the US and the UK started when market interest rates were higher than today. The European programme came when rates were already low…. The policy alternatives… [are] a ‘helicopter drop’…. The ECB would print and distribute money to citizens directly. If it were to distribute, say, €3,000bn or about €10,000 per citizen over five years, that would take care of the inflation problem nicely. It would provide an immediate demand boost, and drive up investment as suppliers expanded their capacity to meet this extra demand. The policy would bypass governments and the financial sector. The financial markets would hate it. There is nothing in it for them. But who cares?…

Must-read: Draghi Day

Must-Read: FastFT: Draghi Day: “Rabobank describes the wild market moves that followed the European Central Bank rates decision and press conference as ‘carnage’…

…Whether that’s the ECB’s fault or the markets’ depends on who you speak to. Here’s a taste…. Jim Reid at Deutsche Bank sees signs of a strop in the market…. “Imagine you were expecting a trip during school holidays in a caravan around the country but instead you can take 2 weeks off school, fly first class to Disneyworld, have a go in the cockpit on the way, stay at a hotel made of chocolate, and then be able to go on every ride every day without queuing and have a private play session with the real Mickey Mouse as each day draws to a close. However if the market was the same kid its reaction yesterday was ‘do I not get unlimited spending money, and where are we going for our summer holidays then?’”…

Frederik Ducrozet at Pictet says ‘don’t fight the ECB’: “Such a policy package designed to boost bank lending and to improve QE implementation should lead to a significant easing of monetary and financial conditions. We are positive on the net impact….” Peter Schaffrik at RBC: “We do not share the negativity and could well imagine that the initiative to engage in risky assets will find more coverage going forward.”… And the economics team at BNP Paribas….

Now for the critics…. Lutz Karpowitz from Commerzbank says the central bank is ‘firing blanks’. He has issues with TLTRO 2, where the banks can effectively fund their lending at negative rates from the ECB…. Grant Lewis from Daiwa…. “The cost of finance is only one consideration for banks when deciding whether to lend or not – of at least equal importance is how the underlying economy, and hence the loan itself, is expected to perform. And on that measure it’s far from certain that today’s announcements will prove transformative to the economic outlook. Indeed, the ECB’s own forecast for 2017 sees growth of just 1.7% and inflation well below target at just 1.3%.” Rabobank’s Piotr Matys says ECB can forget about talking the euro down: “The damage to bearish bets against the euro, however, has been done. Those market participants, including yours truly, who went into the ECB meeting with a bearish view on the euro ended Thursday’s session calculating their losses instead of celebrating profits… after such a massive blow as on Thursday Draghi and other ECB officials may find it even more difficult, if they choose to do so, to talk the euro down.”

Citi‘s rates team says Draghi’s bazooka has ‘backfired’: “The bazooka backfired because the ECB is taking rate cuts off the table. We expect easing to be priced out. The measures do little to convince us that realised inflation will move higher any time soon.” That said, the same bank’s emerging-markets team says ‘the ECB delivered’: “There is now an incentive to move away from a policy fully centered on negative rates, to a toolset centered on further relief of financing in the banking sector. The markets should be cheering that, rather than reacting in a negative way.”