The ECB kept the refi rate unchanged at 25 bp and the deposit rate unchanged at zero.
At the press meeting, Mr Draghi more or less repeated the introductory statement from January and hence gave no new policy signals.
The two triggers that could prompt new ECB easing: an unwarranted tightening of money market conditions, and a worsening of the medium-term outlook for inflation, was discussed intensively.
Unwarranted tightening of money market conditions
When asked about ending the SMP sterilisation, Mr Draghi said: what measures we will decide to activate depends on the contingencies that we face. In our view, this could indicate that ending SMP sterilisation could happen in case of an unwarranted tightening of money market conditions.
Mr Draghi especially noted that current tightness in money markets had not spilled over to medium- to longer term rates. Indeed, as we have pointed out, swap rates have come down during January and the EUR is more or less unchanged vs the USD compared with early January.
More tightness in the money markets is needed to prompt an ECB reaction.
Deflation risks still not there
The Governing Council still does not see deflation.
Inflation will be low for a protracted period, but medium-term inflation expectations remain firmly anchored. Moreover, Mr Draghi noted that the low January inflation number was to some extent due to energy prices. However, he did admit that inflation was lower than expected and said that more time was needed to get a clearer picture.
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.
Market reaction – Draghi recycling & markets react
Draghi believes in recycling apparently; today’s tone and content was largely that from January. As we wrote in the preview earlier this week, no action and less than super dovish could and should impact short term rates upwards. This is the immediate reaction. Eonia 1Y is up 3.5bps, 1Y1Y also about +3.5bps. Do note that the inversion maintains so far with 1Y in 13bps and the 1M Eonia swap in 17bps. So the market has not completely abandoned the thought of further easing down the (near term) line.
Against Euribors, 5Y sells off the most, implying a 2s5s increase of 2bps. Further, the 3M EURUSD xCcy basis immediately reverted some of its recent movements and lies +2bp to -4.5bps and quite related the EURUSD FX spot increases almost a full figure.
The inflation market doesn’t react strongly to Draghi – as usual, at least not immediately; inflation swap rates are largely flat.
We see potential for 5Y to correct a bit vs. 10Y, currently this has flattened about 1.5bps.
Nordea