Here's why almost nobody likes the ECB's 'roach motel' cheap money policy for banks
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The European Central Bank on Thursday took a knife to euro zone growth forecasts and extended a fresh lifeline of cheap lending to banks, unnerving investors and underscoring the diminishing returns of easy money.
The policy decision — coming only months after the ECB curtailed its crisis-era policy of stimulative bond buying — roiled markets rather than reassuring them. In midday trading on Thursday, the Dow Jones Industrial Average (^DJI) tumbled by more than 200 points, while the euro (EURUSD=X) changed hands at around $1.12, down more than half a percent on the day.
“The ECB was more dovish than expected, [and the] euro is paying the price,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. Citing the $1.12-1.1250 area as important in the near term, Chandler added that investors were pricing in an interest rate hike for next year at the earliest.
Ordinarily, accommodative central bank policies send asset prices higher, and cheer market participants. Yet the ECB’s policy reversal reinforced how Europe’s economy remains stagnant — even as the U.S. continues to grow — against a backdrop of a moribund banking sector.
The ECB’s downward revision to growth expectations was “significant...and I fear, one that may still be subject to downside,” Mohamed el-Erian, the chief economic advisor to Allianz and a veteran economy watcher, wrote on Twitter.
‘Roach motel’ policy
Peter Boockvar, chief investment officer at Bleakley Advisory Group, singled out Europe’s negative interest rates, where commercial banks are charged to hold money with the central bank.
In a note to clients on Thursday, Boockvar said the policy was tantamount to a “roach motel” — an allusion to a baited household trap where insects check in, but don’t check out.
“Banks are thus the constituency that suffer the most from this policy at the same time they are the supposed transmission mechanism for it,” the investor said.