What a starter. Today, the ECB cut interest rates by 25 basis points to 1.25%. The worsened economic situation and the prospect of a mild recession were the main drivers of the ECB’s decision. Following the well-established tradition of his successor Jean-Claude Trichet, new ECB president Mario Draghi did not give any hints on further rate changes. The never-precommitment phrase is still around.
The biggest change in the ECB’s macro economic assessment was in the economic analysis. According to the ECB, there were signs “that previously identified downside risks have been materialising”. With a weakening of domestic and external demand and a worsening of hard and soft data, the ECB is now expecting a mild recession towards the end of the year.
Of course, the ECB’s main objective is to maintain price stability and not to support economic growth but at the current juncture, growth seems to be the main concern and inflation is considered to be a second-round effect. According to the ECB, the weaker economic prospects have reduced inflationary risks. For the first time in a long while, the ECB talked about inflation rates returning to levels below 2%. Nevertheless, at least after today’s cut, the ECB still (or again) considers the risks to the medium-term outlook for price developments as broadly balanced. All in all, there was probably no single event which triggered today’s rate cut. It looks as if the ECB already considered a rate cut last month and just needed more evidence of a weakening economy to walk the walk.
Of course, there is no ECB press conference without questions on the sovereign debt crisis. Asked to comment on recent developments in Greece and the Eurozone reply, Draghi said it was hard to comment on such a fast evolving situation. Moreover, Draghi recalled the European Treaties which do not provide for an exit from the monetary union.
Interestingly, Draghi drew a more distinct line between monetary policy and the sovereign debt crisis than his predecessor Trichet had done in the past. While Trichet sometimes had given rise to speculation that the ECB could beef up its bond purchasing programme, Draghi was more explicit in pointing to the limits of the programme. According to Draghi, the ECB’s bond purchasing programme followed three principles: it was temporary, limited and purely justified by the monetary transmission mechanism. He also remarked that the main responsibility was with national governments, not with any kind of external support. In Draghi’s view, it was also impossible to keep bond yields artificially low for a sustained period. Bottom line is that the ECB is not eager to take over the role of unconditional lender of last resort any time soon.
All in all, new ECB president Mario Draghi was not thrown in at the deep end but rather jumped with a lot of verve. The ECB has a new communication style but no new monetary policy strategy. It is obvious that the ECB has caught the crisis virus and is trying everything it can to prevent a full-fledged recession.