ECB president Mario Draghi surprises Commodities market with boldness

UNITED STATES September 09 2014 3:39 PM
NEW YORK (Scrap Register): European Central Bank President Mario Draghi once again demonstrated a boldness that surprised commodities market last week when the ECB not only cut interest rates but announced the purchase of asset-backed securities.

Draghi recalls his track record and he reversed (former ECB President Jean-Claude) Trichet's rate hikes almost immediately upon taking office. He nearly single-handedly ended the existential crisis facing (the) euro by aligning the ECB with the preservation of the monetary union, said Brown Brothers Harriman.

Draghi brandished what former U.S. Treasury Secretary (Henry) Paulson may have called a 'big bazooka' -- Outright Market Transactions -- whose use has not been triggered, and may never be used. He created a facility that lent cheap funds to member banks for three years, which helped drive down bond yields, and created the conditions that allowed financial institutions to return to the market.

BBH said that Draghi also done something no other major central bank has done:

"Namely, charge banks for the privilege of leaving funds with the central bank. Even Japan, who wrestled with deflation for several years, never took such a bold step. Now he is leading the ECB into a long-term asset purchase program that it seems clear the Bundesbank opposed….The fact of the matter is that the institutional arrangement and rules of engagement are different for the ECB, a central bank that has no Treasury to work with, a single bond market like Federal Reserve or the Bank of England….," said analysts at BBH.

"The fact that Draghi has led the ECB over Germany's and the Bundesbank's objections is noteworthy. It arguably strengthens the institution rather than weaken it," BBH added.