Economics

According to Keith Wade, Economist and Head of strategy at Schroders, Mario Draghi succeeded in surprising markets with his latest salvo, but needs the support of governments and fiscal policy to win this fight.

In today’s policy meeting and press conference the ECB took decisive action to loosen monetary policy. Although expectations were high, Draghi managed to exceed them by including a couple of measures that were not widely expected. As a result, financial markets reacted very favorably to the news.

The first few days of the year were particularly challenging for capital markets. Further incertitude regarding the strength of the US cycle and the possibility that the Chinese economy is weathering a heavy depression drove risky assets lower, bucking the traditional early-year trend.

According to Keith Wade, Chief Economist & Strategist at Schroders, despite the market reaction, this move comes out of weakness and also raises the risk that China may retaliate with a further depreciation of its currency. If so, we will have entered a new phase in the currency wars where countries fight over a limited amount of global growth, an outcome which does not bode well for risk assets.

According to Simon Ward, Chief Economist, Henderson Global Investors, the Bank of Japan’s surprise decision to introduce a negative interest rate on the top tier of banks’ reserve holdings recalls the famous Beyond the Fringe sketch in which Peter Cook’s squadron leader character calls for a futile gesture to raise the tone of the war.