Thursday, January 12, 2012

ECB takes a breather

After two consecutive rate cuts in November and December, the ECB today kept interest rates unchanged. In the Q&A session after the meeting, ECB president Draghi left the door open for further rate cuts.

The ECB’s macro-economic assessment was an almost verbatim copy of last month’s assessment. As regards growth, the ECB still sees substantial downside risks, mostly stemming from the debt crisis and financial market tensions. At the same time, the only new element of the macro assessment was the ECB’s observation that there were first tentative signs of “a stabilisation at a very weak level”. As regards inflation, risks to the medium-term outlook remain balanced. The ECB still expects headline inflation to stay above 2% for several months, before dropping below 2%. All in all, the ECB’s macro assessment confirmed the impression of the last two months, namely that at the current juncture the ECB’s main focus is on growth, not on inflation.

Even if ECB president Draghi pointed to the first tentative signs of stabilisation at a low level, the door for further rate cuts was opened. Contrary to the last two hiking cycles, the ECB has never used code words to pre-announce rate cuts. However, it might be more than pure coincidence that the only really new phrase in the first paragraph of the introductory statement “a very thorough analysis of all incoming data and developments over the period ahead is warranted” was exactly the same sentence used by his predecessor Trichet at the October meeting. And there was more. Draghi declined to label the 1% level a floor for ECB rates and also stressed that the ECB stood ready to act. All in all, still high inflation and tentative signs of a stopping of the growth deterioration have motivated the ECB’s current wait-and-see stance. As soon as the Eurozone economy slips further, a next rate cut looks highly probable. Further rate cuts are clearly growth-dependent.

On all other issues like the Eurozone debt crisis, bond purchases, PSI in Greece, non-standard measures and Hungary, Mario Draghi mastered his first challenges of talking without telling anything new rather well. He reitereated the ECB’s criticism of the PSI but refrained from giving any advice on the negotiations in Greece.

After a helter-skelter start of his ECB presidency with two rate cuts within two months, Mario Draghi could today finally enjoy a rather uneventful press conference. The ECB has taken a breather. With the main interest rate at 1% and the enormous liquidity measures, the ECB remains ahead of the curve and still has room to react if need be. No doubt, the ECB will not hesitate to use it.

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