A Few but Not Many ECB Policymakers Favored a Rate Cut Today

June 6, 2012

The ECB Governing Council did not reduce the 1.0% refinancing rate or the 0.25% deposit rate and 1.75% marginal lending rate.  The interest rate vote, however, was not unanimous, and President Draghi’s introductory statement qualitatively downgraded the characterization of current economic conditions.  In May, the statement spoke about “a stabilization in economic activity at a low level,” and today’s asserts that “economic growth in the euro area remains weak, with heightened uncertainty weighing on confidence and sentiment, giving rise to increased downside risks to the economic outlook” (Bolding added).  While Draghi in the press conference spoke of mixed signals lately in the data, many market participants will assume that the ECB is going to cut rates in July unless data between now and then do not provide evidence that a growth stabilization process is still intact.  ECB officials still assume that a gradual recovery will take shape as 2012 unfolds.

New macroeconomic forecasts for 2012 and 2013 were barely changed from prior projections released in March as shown below.  As noted, the balance of growth risks was changed from skewed to the downside to “Increased downside” risk.  Price risks remain the same, namely broadly balanced around a baseline view that CPI inflation will exceed target this year but fall below 2% and into the target of “below but close to 2%” in 2013. 

  GDP 2011 GDP 2012 GDP 2013 CPI 2011 CPI 2012 CPI 2013
06/12   -0.5%/+0.3% 0.0%/2.0%   +2.3%/2.5% +1.0%/2.2%
03/12   -0.5%/+0.3% 0.0%/2.2%   +2.1%/2.7% +0.9%/2.3%
12/11 +1.5/1.7% -0.4/+1.0% +0.3/2.3% +2.6/2.8% +1.5/2.5% +0.8/2.2%
09/11 +1.4/1.8% +0.4/2.2%   +2.5/2.7% +1.2/2.2%  
06/11 +1.5/2.3% +0.6/2.8%   +2.5/2.7% +1.1/2.3%  
03/11 +1.3/2.1% +0.8/2.8%   +2.0/2.6% +1.0/2.4%  
12/10 +0.7/2.1% +0.6/2.8%   +1.3/2.3% +0.7/2.3%  
09/10 +0.5/2.3%     +1.2/2.2%    
06/10 +0.2/2.2%     +0.2/2.2%    
03/10 +0.5/2.5%     +0.9/2.1%    
12/09 +0.2/2.2%     +0.8/2.0%    

 

Decisions on non-conventional monetary measures were predictable and uneventful.  Something had to be said about 3-month LTROs, as the deadline of those announced back in October has been reached, and officials simply affirmed these will continue and cover the period to the end of this year.  Likewise, they again affirmed that the main refinancing operations (MROs) will continue “as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 12th maintenance period of 2012 on 15 January 2013.”  In Q&A, Draghi reminded us that all non-standard actions intended to support money market functionality are temporary and infinite, and he said that applies to both LTROs and SMPs (the ECB’s purchase of national government bonds). 

Draghi did not reveal new information about how the ECB feels on the many recommendations and debates regarding how to end the debt and banking crisis.  These matters are the responsibilities of elected politicians and the voters who put them in charge of fiscal and other policies.  He did endorse the use of “comprehensive product, labor, and financial sector reforms” to promote sustainable growth as a needed complement to but not substitute for fiscal consolidation.  He also welcomed the European Council’s accord to reflect harder on the long-term vision of European and Monetary Union.  Again there was no surprise in those stances.  While not backing down on past positions and agreeing that Europe is in a difficult situation that warrants expeditious policy treatment, he would not endorse the view of those, like George Soros or Bill Clinton, that there is a time limit of 2-3 months when this hard work must be accomplished, lest EMU fall apart, and he also downplayed the vulnerability of the rest of the world economy to Europe’s current problems.

Markets have not reacted decisively to the press conference and ECB decision.  The euro is trading near its level of three hours ago.  The 10-year bund yields hasn’t changed, and the Dax remains up but not as steeply as before.  U.S. stocks have risen, too.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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