European Central Bank President Mario Draghi may have disappointed some investors by not taking monetary easing steps Thursday, but ECB watchers say his press conference left the door wide open for additional moves in March.
Draghi made a point of highlighting that the Governing Council simply did not have enough information in the current “complex” environment to take a decision in February. Analysts highlighted several developments that could potentially tip the balance in favour of action next month, including another spike in EONIA rates that could warrant additional liquidity measures. The ECB’s staff projections in March, including for the first time an inflation forecast for 2016, will be a critical signal for how the ECB views medium-term inflation prospects.
Still, others argue additional easing is far from assured. Some analysts noted that Draghi put a greater emphasis than usual on the Eurozone’s recovery, suggesting the improving economic outlook – and not just inflation – will play a big role in whether an easing move is made in coming meetings.
The following is a collection of comments from ECB watchers following Draghi’s monthly press conference:
RALPH SOLVEEN, Commerzbank: “The ECB Council decided not to change its monetary policy … But this surely does not mean that further expansionary ECB measures are off the table. The ECB President affirmed yet again that the central bank was ready to act if necessary. He also pointed out that information relevant to a decision had been lacking and would be available by the meeting in early March.
“We assume that the ECB will take further expansionary measures in the coming months because the core rate of inflation will continue to fall far short of the ECB’s expectations (chart). We still think a rate cut – presumably as early as March – is the most likely option. Presumably, only strong data from the real economy could prevent additional measures.”
FREDERIC DUCROZET, Credit Agricole: “As for rates, on balance it’s still a close call but my impression is that Draghi tried mostly to postpone a decision to next month … I was surprised that Draghi did not comment on the upcoming survey of professional forecasters, which he usually does especially with so much focus on inflation. I’ll be having a very close look at these measures of inflation expectation, both medium to longer term and I think it could tip the balance as well.
“The lack of fresh liquidity measures is actually a bigger [disappointment] than the lack of action on policy rates, because we’re still not left without any clear view about what is happening next. I suspect that next week we could see some tensions on EONIA rates coming back so this is an ongoing issue and I definitely still expect something to be delivered by the ECB in coming months on the liquidity side.”
PHILIP SHAW, Investec: “Our reading is that the GC is close to deploying another instrument, possibly next month if the ECB’s medium-term inflation projections are sufficiently weak or if money market tensions do not subside sufficiently. We are of the impression though that the most likely action is the introduction of another non-standard measure, such as stopping the sterilisation of the liquidity from the E175.5 billion of SMP bond purchases, than a cut in rates. On the latter, our guess is that the ECB would prefer to keep its powder dry. Arguably the threat of a 10-15bp move is more potent than a reduction by the same amount.”
ELGA BARTSCH, Morgan Stanley: “The press conference seemed to signal that the Bank is considering a rate cut at the March meeting, in line with our long-standing forecast. By the March meeting, the Governing Council hopes to have a better handle on: (1) the medium- to long-term inflation outlook as the staff will for the first time provide projections also for 2016, (2) on the persistence and the breadth of the recent turmoil in emerging markets, (3) on the amount of window dressing by banks around the AQR cut-off date, and (4) on the outcome for 4Q GDP growth. ECB President Draghi stressed several times that the Bank is ready and willing to act, if needed.
“Given that the March meeting will likely see a small downward revision of the ECB staff projections, we believe that another small rate cut is the most likely course of action. Such a move might also be accompanied by a small reduction in the depo rate.”
ELWIN DE GROOT, Rabobank: “Unless there is significant deterioration in the economy, inflation or in money market rates, the ECB could be on hold for the next several months. This is a bit of a change because under Draghi the ECB has always been an activist central bank. When there were doubts they took action. Now there are doubts and they are not taking action.”
MARC OSTWALD, Monument Securities: Draghi “left open the possibility of some form of policy move in March, without making any commitment there to, with much depending, as Draghi said on “the macroeconomic projections by the staff” … While many commentators will lean towards the assumption that downward revisions to their CPI forecasts, and/or a 2016 CPI forecast that is well below the ECB’s target, this is far from assured.
“Conclusion: a policy move in March is possible, but the probability appears to well below 50%, especially given that the ECB is very unsure which systemic and / or economic vulnerabilities it should, or rather needs to, take most immediate action about. Market impatience with the ECB is likely to grow, but much will depend on how high the current ‘wall of worry’ becomes.”
CHRISTIAN REICHERTER, DZ BANK: “The ECB staff projections on economic and inflation developments will be coming ever-more into focus to gauge future monetary policy. These will be released in March and will extend for the first time into 2016, and should shine more light on the impact of the current emerging market turbulence on the real economy in the euro area.
“For the coming months we generally expect a continuation of the steady-hand policy. This is also reflected in our opinion on the continued emphasis on the forward guidance: Those who have little ammunition will be inclined to handle it carefully.”
HOWARD ARCHER, IHS: “While the ECB held off from taking further stimulative action, both its statement and comments by President Mario Draghi very much kept the door open to future action, and as soon as March … While it is far from guaranteed, there is clearly a very real chance ECB could end up trimming its refinancing rate from 0.25% to 0.10-0.15% in March.
“The ECB is perhaps most likely to take action in the near term to boost liquidity and ease pressures in Eurozone money markets. There is currently considerable speculation that the ECB could stop fully sterilizing its bond buys and Mr. Draghi indicated that this is ‘one of many instruments’ that the ECB are looking at (although he added that it was not discussed at the meeting).”
ANDERS SVENDSEN, Nordea: “The new ECB staff projections in March will be very important for the risks of more easing. The new staff projections will include an inflation forecast for 2016, which should probably be close to but below 2% for Draghi to conclude that medium-term inflation expectations have not deteriorated.”
“Markets are disappointed with the ECB. Indeed, rates have increased and the EUR has strengthened. However, Mr Draghi actually signalled some gradual optimism on top of a lot of uncertainty. Markets may be disappointed, but the economy is moving in the right direction. We still do not expect more ECB easing.”
JANA MEIER, HSBC Trinkaus: “There had been a little bit of anticipation – we saw some movement of the market. Draghi took the wind out of the sails in that sense.
“Everything is open regarding the future. Draghi kept to his forward guidance so we have that as an indication. We don’t, however, have a concrete view as to when interest rates may be changed. We will have to watch the turbulences in the emerging markets though – Draghi stressed this in his analysis today. That is something that may change the picture for the ECB.”
CARSTEN BRZESKI, ING: Draghi’s introductory statement “for the first time in a long while started by stressing the recovery and only then moved to inflation developments. In our view, the best explanation why the ECB did not act today. At least today, recovery hopes won from deflation fears.
“Draghi had recently more problems in getting his message across. Today’s meeting should have helped in finally explaining the ECB’s current reaction function. In our view, only a significant increase in money market tensions and/or a worsening of the medium-term inflation outlook will trigger further action. In this respect, the March meeting with the presentation of the staff projections will indeed be crucial. Remember that in December, ECB staff had predicted an average inflation rate of 1.3% for 2015. A lower number for both 2015 and 2016 would clearly open the door for more ECB action.”