ECB Preview

January 9, 2013

Market participants are not anticipating more stimulus, but a rate cut or new unconventional support cannot be ruled out.  Indeed, a rate reduction was discussed widely at the December meeting, and the decision to keep the existing rate structure unchanged was not made unanimously.  New staff forecasts were adopted at the December meeting that certainly could have justified a rate cut, and President Draghi has not been bashful about taking bold steps and unexpected ones.

Since a cut last July, the refinancing rate has been 0.75%, flanked symmetrically by a zero deposit rate and a 1.5% marginal lending rate.  Any further cut implies moving to a negative deposit rate, a step that has not been categorically ruled out on technical grounds.  German Bundesbank President Weidmann has, however, criticized “excessive” ECB ease taken thus far — both the main interest rate and other unconventional actions to fix the transmission of policy. 

The ECB did not ease in December even though projected GDP growth and CPI inflation in 2013 were revised downward.  Growth was revised to a range centered on minus 0.3% (off 0.9% to +0.3%) from one centered on +0.5% (off 0.4% to +1.4%).  The likely inflation range was moved to 1.1-2.1% from 1.3-2.5%.  Since the Governing Council met in December, news that could affect the group’s predisposition differently this time have been mixed.

  • Peripheral bond spreads have narrowed, further alleviating financial stress.
  • The purchasing managers surveys in December point to more negative growth in 4Q than 3Q12 but also suggest that the recession is becoming less intense.  The composite PMI touched a 9-month high, albeit still lower than 50 with a reading of 47.2.
  • Germany’s IFO business climate index improved to 102.4 from 101.4 in November and 100.0 in October. 
  • The Sentix gauge of investor sentiment toward the Ezone economy rose 9.8 points in its latest reading.
  • The latest German data on industrial orders (-1.8%), industrial output (0.2%), exports (down 3.4% on month) and imports (-3.7%) were disappointing
  • Euroland’s economic sentiment index rose 1.3 points to 87.0 in December.
  • CPI inflation is still slightly above, not slightly below, 2.0%.  The mandate still remains just beyond reach.
  • Labor cost inflation accelerated to 2.0% in 3Q12 from 1.9% in 2Q and 1.6% in 1Q.
  • The 11.8% jobless rate is still cresting.
  • Retail sales in October-November were 1.3% below the 3Q average level.

With the weight of evidence a month ago not great enough to elicit a rate cut and new information since then being mixed, most market analysts have concluded that the ECB will not act this month, either.  Those taking the view that a rate cut is coming tomorrow are placing considerable stress on the weakness of money and credit growth.  This is an ongoing development and one that hasn’t changed dramatically over the past month.  If this were to be a policy driver, it should have done so at the December meeting, one would think.  Moreover, the OMT facility has not yet been used by any country.  Until that happens, it’s hard to disprove the belief of ECB officials that the transmission mechanism of policy is still broken.  Policymakers have previously expressed the view that cutting the main interest rate is pointless while its transmission fails to be felt by countries most in need.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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