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Be careful, when Mario Draghi gives hints

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The presidents of the central banks like many politicians, economists and journalists often change their minds. This is why investors must be careful about what they say or wanted to signal.

After reducing the interest rate on deposits to -0.4%, Draghi could not be more clear, saying: "We do not expect that we will have to cut rates further.". Although he left the possibility of further cuts open, he outlined his concerns about negative interest rates and their impact on banks in the region.  Therefore, some investors and analysts believe that interest rates have reached their peak in the Eurozone.

But Mr Draghi has made similar statements after reducing the rates before. In June 2014 he cut rates to -0.1%, and said: "For all practical purposes, we have reached the bottom line." In September 2014 he lowered rates to -0.2% saying "We are in the lowest limit where technical adjustments will not be possible further."

The obvious model Mario Draghi signaling a bottom has been reached, only to change his mind later. The most likely reason for his "no less" signals that he does not want to scare the markets.
Banking stocks, bonds and credit default swaps have been shaken by worries about negative interest rates and their impact on banking.

There are also concerns for banks in Eurozone countries such as Austria, Portugal and Spain, where mortgage interest rates may remain negative in the case of the ECB make further reductions since these mortgages are associated with rates of euro area fund market. In other words, banks in Austria, Portugal and Spain may ultimately be required to pay customers, which would be bad news for bank balances.

In fact, Draghi and the ECB will likely cut interest rates further if inflation and the economy does not move up. Therefore, investors need to be alert when central bankers hint policies.  Their job is to stabilize and calm the markets, which sometimes means being economical with the truth.


 Varchev Traders

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