At today’s meeting, despite a surprisingly downbeat economic outlook, the ECB kept interest rates on hold. For the first time since the start of the crisis, the December meeting was no early gift giving for financial markets and the Eurozone economy.
The ECB’s macro-economic assessment remains cautious. Risks to the economic outlook are still to the downside, while risks to the outlook are seen as broadly balanced. According to Draghi, the ECB expects economic activity in the Eurozone to gradually recover “later in 2013”. This trajectory is also reflected in the latest ECB’s staff projections. In these projections, GDP growth forecasts for 2013 have been revised downwards significantly. The new mid-point projection is now -0.3%, from +0.5% in September. For 2014, ECB staff expects GDP growth of 1.2%. As regards inflation, the projections were revised slightly downwards. For 2013, ECB staff now expects inflation to come in at 1.6%, from 1.9% in September, and 1.4% in 2014.
It looks as if there are diverging views on the economic outlook within the ECB. At face value, the sharp downward revision of the growth outlook for 2013 and lower inflation could have been an ideal invitation for another rate cut. Draghi’s comment that there was a “prevailing consensus” to leave rates unchanged indicates that some ECB members must have been in favour of a rate cut. The decision to keep rates on hold, at the same time, shows that currently more ECB members believe in green shoots sprouting in the winter and half-empty glasses turning half-full rather than in their own staff’s projections.
The fact that the ECB kept rates on hold even after these strong downward revisions for growth and inflation in our view shows that the ECB prefers to stimulate the economy with non-standard measures and not with additional rate cuts. This view is supported by the ECB’s decision to continue the main refinancing operations with full allotment at least until early July 2013. A rate cut might not entirely be off the table but would require an even worse weakening of the economy.
Since the start of the crisis, ECB meetings in December had been early gift givings for financial markets and the Eurozone economy: a 75bp rate cut in 2008, generous liquidity provisions in 2009 and 2010 and a rate cut and the LTRO bazooka last year. It looks as if at least this year, Mario Draghi quit his job as early Santa Claus.