How Mario Draghi became a friend of investors


The monetary policy of the ECB gives birth brokers
How Mario Draghi became a friend of investors

Hesitantly hesitating: ECB President Mario Draghi


Hesitantly hesitating: ECB President Mario Draghi

The European Central Bank remains on track when it leaves an ultra-loose monetary policy. Investors in the financial markets welcome this, although they will shortly be short of liquidity – why?

At first glance the situation might be surprising: two central banks have announced a cautious monetary policy this week – and in both cases the financial markets have reacted with satisfaction.

Firstly, the Turkish central bank raised interest rates by as much as 6.25 percentage points to 24 percent. A movement that welcomed investors because it seemed urgently needed in the light of the decline in the Turkish lira and the already clear impact on the country's economy. In addition, the central bankers made their independence clear from the Turkish president Erdogan, who had recently ruled against higher interest rates. Result: The lira suddenly gained 5 percent in value after the measure.

The decision by the European Central Bank (ECB), announced a little later on Thursday, is likely to be of great importance to most investors in this country. The ECB underlined its cautious approach for years: the central bank wants to reduce the volume of its bond purchases from the previous 30 billion euros per month from October to 15 billion euros. The bankers around ECB president Mario Draghi, however, stopped buying at the end of this year, on condition that the economic data could then allow this. The ECB also wants to keep interest rates at a record low of 0 percent until at least the summer of 2019.

Lo and behold, the measures of the European Central Bank have been well received by investors. Stock prices were boosted, with the euro appreciating against the dollar.

This reaction can be surprising because it is in fact in contradiction with the presentation of the textbook on the economy. Interest rates up, prices down and vice versa – that's one of the most frequently cited rules of thumb. In other words, when central banks open their money locks, much of the liquidity often ends up on the financial market, where it increases prices for stocks, bonds and other asset classes. However, central banks are returning the money, so the opposite reaction from the markets can actually be expected: for example, falling share prices.

At least in theory. The fact that this is not the case in practice – although critics have warned about the moment when the ECB is trying to reverse its ultra-thin monetary policy – can be explained with one simple word: trust.

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