The ECB kept their benchmark interest rate unchanged at 0.5% today. As with all central bank announcements, investors were focused on the nuances of ECB President Mario Draghi’s prepared remarks at a press conference held in Paris, in order to find any hint about future policy.
Draghi’s tone on the economy was optimistic, so further easing seems improbable. Inflation at 1.1% in September was “anticipated,” and the ECB believes the low levels of inflation are in part due to temporary factors. Draghi said nothing that would open the door for further rate cuts, and policy makers do not appear to feel that further easing is warranted. Draghi also made no reference to the market’s expectations for future interest rates, and futures markets appear to be pricing in a rate hike in early 2015.
The main takeaway is that no will be help for struggling EU economies from the ECB in the near future. In light of this, Northern European countries such as Germany (EWG) are in a better economic position than Southern European countries. With inflation at 1.1%, the ECB appears to have substantial dry powder for monetary easing while staying below its 2% ceiling. However Draghi and other policy makers at the ECB do seem to have any issue with the recent performance of economies such as Spain and Greece.
Many investors are still underweight Europe even as ETFs with Euro exposure have done well this year, including EFA, EZU, FEZ, and IEV. For investors who prefer to invest in stronger economies and do not want exposure to Southern Europe, consider investing only in Germany via the EWG ETF.