ECB meeting - All Quiet in Frankfurt

As expected, the ECB kept its powder dry at today’s meeting. Rates on hold and no other measures to support the Eurozone economy. Instead, lots of backslapping for the new crown jewel, the OMT program.

The ECB’s macro-economic assessment remained virtually unchanged. The ECB does not close its eyes to the Eurozone reality, expecting no improvement of economic activity towards the end of the year. It looks as if next month’s ECB staff projections will join the crowd of downward revisions for 2013 growth. As regards inflation, the ECB still expects headline inflation to drop below 2% in the course of next year. The closely monitored balance of risks remained unchanged. According to Draghi, risks to the economic outlook remain on the downside. Risks to the outlook for price developments remain broadly unchanged.

Ahead of today’s ECB meeting, there had been some new speculation about a possible rate cut when Mario Draghi yesterday said at a speech that the “risks of inflation are currently very low over the medium term”. Some market participants had interpreted this as a dovish signal, even worthwhile breaking the so-called Purdah period ahead of ECB meetings. Today’s press conference shows that the speculations were premature. The ECB’s bias remains unchanged. Of course, there still is a bias towards easing but it is not an imminent rate cutting bias.

In fact, Draghi’s countless repetitions of the importance of the OMT program indicates that the ECB currently does not consider rate cuts as an effective tool to tackle the recession. Draghi confirmed that the ECB stood ready to activate the program. However, activation required a country to ask for an ESM program. There was no OMT without a program.

The OMT remains the crown jewel in the ECB’s anti-crisis toolbox. However, as Draghi rightly said, with the OMT, the ECB has put in place a fully effective backstop for the Eurozone. A backstop against the tail risk of a Eurozone break-up. In our view, however, the OMT is not the magic bullet that can also restore growth. Even with structural reforms, austerity measures and an active OMT, chances are high that the ECB will need to come up with additional measures to support the Eurozone economy. A rate cut, even if it will not come next month, could be part of the measures.

All in all, today’s meeting was almost a non-event. The information content was close to zero. If the ECB ever starts a reassessment of its transparency policy, today’s meeting provides an argument to shorten the press conferences.