What The ECB's "Unprecedented" Forward Guidance Means

Tyler Durden's picture

Confused what the (non) news of today's "unprecedented" forward guidance announcement by the ECB means? Shocked that the ECB is about as dovish as it has ever been, after having missed the following chart showing the record low European bank lending to the private sector which predicted all of today's action (Stolper's long EURUSD reco fade notwithstanding)...

Then SocGen is here to explain, if only for all those who are seemingly stunned that the ECB isn't planning on hiking rates, or even "tapering" any time soon.

"Forward Guidance" Introduced, from SocGen

The ECB came out with all dovish guns blazing today to reverse the tightening in money and financial market conditions since June, stoking a rally in euribor futures (lower rates) but causing the EUR to drop nearly 1% vs the USD. The only thing that was missing today was a cut in the refi rate and/or negative deposit rate, but neither has not been ruled out given that downside growth risks continue to exist. Casting better macro data side, the ECB officially introduced ‘forward guidance' on rates and said exit is “very distant”.

The introduction of ‘forward guidance' characterises the fact that all key ECB rates will stay low for a longer period. This makes the ECB fall in line with the guidance by the US FOMC on the Fed funds target, the Bank of Canada and most probably, the BoE in August. Put on the spot during the press conference, president Draghi rejected claims the ECB had come off the proverbial fence in response to a changed outlook for US monetary policy given the spill over effect from a steeper US yield curve across the Atlantic and the steepening impact on eurozone core and periphery debt markets. Taking after the BoE earlier (a coincidence, Draghi said), the ECB is worried that the tightening in financial conditions will handicap the prospects for economic recovery in the euro area where the credit growth remains very weak and fragmented.

The move clearly marks an innovative step in the ECB's communication and policy strategy for a bank that previously had always refused to pre-commit on interest rates. Draghi did not commit explicitly how long rates would stay low but hinted that there would be no change for at least 12 months (“extended period is not 6 or 12 months”). The decision to introduce forward guidance was unanimous and how long this bias will be observed will depend on the assessment of three variables ie inflation, growth and monetary developments (credit flows, monetary aggregates). The case for a cut in the refi rate was also discussed but there was no agreement.

The retention of ammunition should the economy move back into reverse was important to the ECB and this probably explains why there was no consensus to cut the refit rate from 0.50%. Draghi categorically said that 0.50% is not the “lower bound” for rates. This implies that further stimulus is still possible. For EUR/USD, key support now rests at 1.2877 before selling towards the April 1.2746 low is stepped up.

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nope-1004's picture



Someone said it best referencing the tavern down the street that has a sign inside that says:

"Free Beer Tomorrow"


That summarizes these impotent central bankers the best.  The carrot on the string is always in front, but never attainable.  It's been 5 fucking years of this grand experiment in lying to the public about a turnaround, or Green Shoots, or exit strategy, or tapering, or whatever the fuck the next word of the day is, and we are still wallowing in a horrible depression via currency and equities manipulation.

Living these days is just sickening.  These assholes suck the life right out of ya.  Too bad they won't admit they are broke.  No other way to classify the world today - WE ARE BROKE!!!!!




disabledvet's picture

"QE Europe" or "cue Europe" for short. "it's all the rage" as they say. "it's the bomb, dude."

TeamDepends's picture

Tomorrow and tomorrow and tomorrow...  It's a tale told by an idiot, full of sound and fury, signifying nothing.


timbo_em's picture

As if interest rates were ever allowed to go up again...

XRAYD's picture

The banking casino complex continues to get finananced at near ZIRP! Maybe Dow 36,000 is now a real possibility, though it is not "real".

Dewey Cheatum Howe's picture

Reject the matrix..............

Racer's picture

What it means that instead of 60% youth unemployment, they have guaranteed that the next generation are impoverished for life, because at the rate of increase it will be 100% youth unemployment that continues for their entire lives

Frastric's picture

You mean there's something more unprecendented than the OMT? <gasp>

plaspotje's picture

You want growth  , one simple step if you have the balls , peg that euro 1 to 1 to the dollar and you will get your jobs back , even plenty for the , ohhh so hard working southern european nations, and guess what only working people do not drain a government budget and that from the european nsa , oops they do not have one, realy?


ATM's picture

and cede European monetary policy to Ben Bernenke? All that will do is bring the Europeans down at the same time as the US, not 3 months earlier.

Clowns on Acid's picture

Bernanke called Dragi (Carney was on the conference call) and toldhim that the US supply of MBS and Tbonds is drying up. Now it is the ECB's turn, after Japan has gone on a buying spree.

You see it is that easy....have all CB's just buy the debt, recapitalize the rotting bank balance sheets with printed cash, tell the baks not to lend it out unless AAA credit ratings (and to lend it out at 5 to 7 % minimum), and all will be fixed.

No inflation, no bond market bursting, equity market goes straight up, people have their equity values again.... no problem.

can't finda job.... well we can't do everything. Sign up for a Snap card or become a ward of the ECB State.

Perfecto !

Unknown Poster's picture

The Euro will remain on the PHD standard until morale improves, and then longer.

Nid's picture

So telling "borrowers" that rates will stay down, and possibly go lower, while telegraphing desperation via your "unprecedented" measures, is an incentive to borrow? Telling "lenders" that they'll continue to earn zero net interest, and possibly get paid not to lend, is an incentive to lend? What a steaming pile of fucking morons we have running this shit show, home and abroad. Oh, but buy stocks.

e m m's picture

Just got this ad on this site https://secure.deutsche-bank.de/pbc/marktinformationen/aktienmaerkte-nac...

The friendly market expert (a Phd.) of this insolvent bank tells me, here and now is a good entry point to allocate some personal wealth into the stock market. Valuations are pretty good and growth will pick up in Europe towards the end of the year. I recall Mario said that too all year, that growth will pick up in the second half of the year, so it's getting pretty convincing.