It is of no surprise that the tensions between the European Central Bank (ECB) and German leaders has increased over the past days, following the strong boost in terms of stimulus the ECB announced on the 10th March. The relation between both parties was further strained as differences continue to grow over the increasingly dovish path being taken by the ECB.

This biggest dissenter which had already commenced criticising the ECB when the latter indicated the possibly of quantitative easing was the German Finance Minister, who responsibly enough pointed out that the monetary stimulus might hinder the German financial system and the German economy per se.

In actual fact, the major concerning issue is the fact that low interest rates are creating indeed a gaping hole in savers finances and pensioners plans. Surely, the point being made by Germany is more than valid, as the low interest rates is causing extraordinary problems for the banks and the whole financial sector in Germany.

One other important point of the Germans showing lack of empathy towards low interest rates is that domestically, the personal savings rate, which is the ratio of personal income saved to personal net disposable net income, is relatively high when compared to other European peers. In fact, in the last quarter of 2015, the personal savings rate was 10 per cent, slightly up from the 9.5 per cent recorded in the third quarter in 2015. Accordingly, savers are getting lower returns.

Despite the aforementioned criticism, yesterday in his usual press conference, Mario Draghi, spoke bluntly on the issue by stating that the mandate of the ECB is to pursue price stability for the whole Eurozone area, and not only for Germany. He added that the ECB obeys the law, not politicians and monetary decisions are totally independent as stated by law.

In terms of monetary decisions, yesterday the ECB held the main refinancing interest rate at 0.00 per cent, the deposit rate at -0.4 per cent and its monthly asset. In addition, the ECB announced that its corporate bonds purchasing will commence in June.

The eligible instruments will be euro denominated bonds and have a credit rating of at least BBB-, with a maturity of between six months and 30 years at the time of purchase. Other than that Draghi also hinted out that further criticism of its policy might undermine the economic recovery and as a result in the need for an extension in loosening further monetary policy.

Thus despite Germany might be right in terms of criticism, the ECB will uphold its easing path and use its tools to stimulate economic recovery. In my view, monetary easing will have an effect in the longer term, and some signs of improvement were noted from the latest economic figures.

That said, the lack of fiscal stimulus, primarily due to the fact that major governments within the Eurozone area are still combating their debt-to GDP targets imposed by the European Commission, is pushing towards a slow and lengthy recovery.

Thus despite monetary stimulus over the longer term will prevail in terms of economy recovery, the path of recovery will be lengthier than most market participants perceive and volatility within markets will be the order of the day.

This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

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