Observers of the European Central Bank came away from ECB President Mario Draghi’s monthly press conference Thursday more unified than they have been in a while, with most convinced the central bank can now be expected to keep its remaining powder dry as long as data on inflation and growth continue to trend upward.
After Draghi’s February press conference put markets on tenterhooks by suggesting the ECB might consider options once it has a more complete picture of the Eurozone economy, his March appearance – combined with positive incoming data since February – appears to have taken the wind out of the sails of those predicting another rate cut is looming.
Even non-standard measures now appear less likely, after Draghi played down the effectiveness of ending the sterilization of its SMP bond programme, a move that many analysts expected would be announced after Thursday’s Governing Council meeting. The move is not off the table however if money market conditions worsen.
The ECB’s updated staff projections, including forecasts for 2016 for the first time, also offered no smoking gun for easing, with most analysts conceding that while inflation is likely to remain at 1.5% in 2016 (1.7% in 4Q 2016), the trend is clearly headed in the right direction. Staff GDP forecasts also tell the tale of a steady if sluggish recovery.
None of this means that further easing by the ECB is off the table, most analysts stress, but Draghi’s remarks do mean that any more accommodation will likely require another bad surprise, either to money market conditions or to the outlook for inflation and GDP.
The following are excerpts of analysts’ reactions collected by MNI:
ELGA BARTSCH, Morgan Stanley: “A disappointing holding operation by the ECB at today’s meeting, where we had expected a 15 bp reduction in the refi rate, was followed by a not-so-dovish press conference. Even though we continue to lean towards further easing by the ECB in the months ahead, the confidence we had in our long-standing call for a further rate cut took a serious hit.”
“The press conference revealed surprisingly optimistic and upwardly revised growth projections. It also presented a rather benign inflation profile, which projects inflation at 1.7% – i.e., at the ECB’s price stability norm – in 4Q 2016.”
RICHARD BARWELL, RBS: “We had originally pencilled in a cut for this meeting, but in light of the news on inflation over the month we pulled the call. As President Draghi noted today, the news on the month has by and large been on the positive side, and that made a rate cut this month unlikely given no change last month.”
“It would be unfair to describe the Council as sanguine about the inflation outlook since the [staff] projection is only described as being closer – rather than close – to 2% at the end of the forecast horizon. Likewise, whilst describing the euro area is an island of stability, President Draghi noted that the euro area was not an island of prosperity or job creation. Nonetheless, the Council left the policy stance unchanged.”
PHILIP SHAW, Investec: “Mr Draghi did not elaborate on how close the GC came to any form of easing, simply stating that there had been a discussion on rates and other policy instruments. He did say that the GC was considering schemes involving ABS, ‘Funding for Lending’ and QE but emphasised that the situations were complex. Hence ECB policy remains one of ‘watch this space’ for non-standard measures. On standard measures, we are still of the view that the GC would prefer to keep its powder dry and not shoot its final bullet on the refi rate and that it is reluctant, for good reason, to introduce a negative deposit rate.”
JOERG KRAEMER, Commerzbank: “The ECB Council was obviously further away from a rate cut than assumed. The ECB did not decide to terminate the tender operations which it uses to siphon off the liquidity injected through government bond purchases under its SMP programme. The Bundesbank had brought up the idea to terminate the liquidity-absorbing SMP tenders so as to fend off farther-reaching demands, for instance calls for a rate cut. The fact that the Bundesbank obviously did not have to play this compromise joker shows that there are not as many advocates of a rate cut as assumed.”
“Given that the central bank did not cut its key rate today, it is likely to leave it on hold also in the coming months. A rate cut is off the table for now. Nevertheless, bouts of weak macro data or low monthly inflation figures can always lead to easing speculation in the context of forward guidance.”
ELWIN DE GROOT, Rabobank: “If nothing major happens the ECB appears set to stay on hold for the next couple of months. This does not mean they do not still have a downward bias. Money market conditions can change quite rapidly. If excess liquidity falls much below the E100 billion level, that could prompt a response. But for the moment, the council feels buttressed by the staff projections that inflation will be moving closer to target.”
PATRICE GAUTRY, Union Bancaire Privee: “The rise of the euro seems to be the most worrying factor at the moment and could cause inflation to decline in coming months — and even approach 0% if the trend continues. If the ECB did not decide on the provision of more liquidity today, it could do so in coming months through the end of the sterilization of the SMP. That liquidity injection could change the dynamics in the exchange market and promote decline of the euro.”
BILL ADAMS, PNC Financial Services: “The ECB is demonstrating that HICP inflation will have to drift lower to force the ECB’s hand. This seems likely by the second half of 2014: import prices are likely to fall on the strong euro and wage-price pressures are feeble. In addition, Eurozone companies lack pricing power due to the weak economy as demonstrated by the very weak increases in prices of non-durable goods…In short, expectations for an eventual further cut from the ECB still have a solid basis, in particular if the euro remains this strong.”
HOWARD ARCHER, IHS Global Insight: “The ECB’s March policy meeting seems a bit of a damp squib with no move on interest rates or liquidity, and no strong indication that it feels action is necessary as things stand.”
“We now very much doubt that the ECB will take interest rates any lower, although we would not completely rule out the bank trimming its refinancing rate from 0.25% to 0.15% or 0.10%. However, we think it is highly unlikely that the ECB will take its deposit rate (currently at 0.0%) into negative territory. We think if the ECB does take any further action, it will most likely be to add liquidity. Even this now looks a little less likely, with Mario Draghi downplaying any benefits from the ECB stopping” SMP sterilization.
CARSTEN BRZESKI, ING: “All incoming data released since February made it very hard to justify further ECB action. The long-awaited ECB staff projection also made it harder to act…Judging from Draghi’s statements, the ECB’s inaction is the result of better-than-expected data but also of the fact that all potential next steps are either highly complicated to implement or highly controversial; or even both.”
“Over the last months, the ECB had often put many market participants off the scent. With today’s meeting, this confusion should hopefully end. New action is still possible but only if tensions in the money market increase and/or the inflation outlook worsens. Until then, the ECB will lean back and do nothing, enjoying what Draghi called the island of stability.”
THOMAS MEISSNER, DZ Bank: “We had not expected the ECB to pull on the interest rate cord any further today. The effects of another rate cut on the real economy would in any case probably not have really been noticeable. We continue to advocate for the ECB to take up other measures than a cut in the main refinancing rate, if it should be needed to ease the still generally difficult situation in the Eurozone, for example by ending the sterilization of bonds held from the SMP program. For the coming months, we expect the ECB to maintain its steady hand policy.”
FREDERIK DUCROZET, Credit Agricole: “One interpretation of the ECB’s inaction is that the Governing Council wants to retain whatever limited ammunition it has for later, in case the EUR strengthens and/or inflation declines further. Moreover, new credit-easing measures targeting an improved transmission to the real economy are not off the table, in our view. Still, the bar for action looks higher now, and the risk is that the window of opportunity will close in the next couple of months.”