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Everything you need to know about Monetary Policy Decisions

Last Thursday, the ECB published yet another monetary policy decision. Given that the ECB and its monetary policy are one of the cornerstones of our economy, it’s surprising how little attention there is – both in the media as in class -for the monetary policy decision and the press conference in which the policy is announced – in fact, the only mentioning of the monetary policy of the ECB was in June this year, when the ECB announce to quit – in a considerable amount of time – the quantitative easing.
So, for those interested in monetary policy: Here’s how to watch, listen and follow the press conferences of mr. Mario Draghi.
1. To QE or not QE? For those who are not familiar with QE, a very short introduction. Usually, the ECB conducts monetary policy via the interbanking lending market. However, due to the Global Financial Crisis, this lending market has dried up and can no longer be used to conduct monetary policy. Instead, the ECB introduced QE: Buying of assets (for instance, bonds), as to provide liquidity to the market and being able to steer interest rates.
2. It’s the delta that counts. The larger part of text of the monetary policy decision remains the same. This, by the way, also goes for other text. As for the ECB, don’t pay attention to phrases like ‘continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’. These will always pop up in press conferences. Actually, the whole press conference can be summarized in just a few numbers and dates: What are going to be the key interest rates (that is, the interest rates the ECB uses for the interbanking lending market), and, in the case of QE, the size of monthly purchases and the moment of . The latter determines when the balance of the ECB will start to shrink again. Remind yourself that (for instance) state bonds will be repaid at a certain moment. If not reinvested, this will lead to a shrinking of the balance of the ECB.
3. Take into account market expectations to understand what’s happening at financial markets. Suppose, for instance, that the market expects Draghi to announce that the ECB will stop QE directly, while Draghi actually announces that QE will remain for at least three months. In the absence of market expectation, markets could react with rising interest rates, but as they were expecting a tightening of monetary policy anyway, the interest rate can decrease.
And remember, every six weeks, the ECB will give an update.

Draghi

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