Thursday, April 4, 2013

Clueless in Frankfurt

At today’s meeting, the ECB kept interest rates on hold. During the press conference, ECB president sent dovish signals without substantiating possible next steps.

Despite a weak batch of confidence indicators in March, the ECB’s tone on the economic outlook remained rather unchanged. The ECB still expects the improvements in financial markets since last summer to “work their way through to the real economy” and still foresees a gradual recovery in the second half of the year. Risks to the economic outlook remain to the downside. As regards inflation, the ECB still sees risks being broadly balanced. As in March, the euro exchange rate is not any longer considered to be a risk to price stability.

Although the ECB seems to stick to its earlier macro-economic assessment and has, at least for the time being, filed the latest disappointing sentiment indicators under “one-off fluctuation”, ECB president Draghi sounded slightly more dovish than in March. The promise that the ECB’s monetary policy stance will remain accommodative “for as long as needed” and that liquidity operations will be continued with full allotment “for as long as necessary” was already given last month but received a more prominent position in today’s introductory statement. Combined with the only real new phrase of “in the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability”, this normally could that a rate cut has come closer. However, during the Q&A session, Draghi explicitly said that the current Governing Council’s consensus was not to look at rates for the time being.

Ahead of today’s meeting, there had been a lot of speculation about possible ECB action to ease financing access for SMEs. Despite some defragmentation in financial markets, Draghi’s earlier whatever-it-takes has not (yet) reached the real economy. One of the reasons for this failure is that defragmentation in sovereign bond markets did not translate into defragmentation of bank lending rates. Re-establishing the monetary transmission mechanism so that credit will flow to the real economy seems to be the ECB’s number one priority. However, judging from today’s press conference, the ECB looks rather clueless on how to tackle the problem.

Draghi acknowledged the problem, saying that the ECB was still looking into the issue. Draghi said that the ECB had discussed several possible measures. However, the studying of other countries’ experiences and measures will continue. What the exact measures could be remains unclear. Draghi just mentioned difficulties and the fact that boosting SME financing was not only an ECB task but could require the involvement of more actors like governments, the EIBs and alikes, and national central banks. Whether this hints at collateral easing or fully-fledged asset purchases remains unclear. In our view, the crucial question of any future SME lending programme will be “who will take the risk”.

Once again, despite new dangers of refragmentation and signs of economic weakening, the ECB has decided to stay inactive. It is obviously not the result of a misjudgment of the current situation but rather the awareness that rate cuts would hardly be effective and that any SME lending bazooka is technically and politically very hard to construct. The fact that Draghi stressed the OMT – up to now a pure psychological measure – as the ECB’s most powerful monetary policy tool illustrates the ECB’s frustration to find further measures. It looks as if the ECB has also realized that there is no bazooka to tackle the economic fragmentation.

If the recovery fails to materialize, the ECB will have to choose one of the two options. But for the time being, the ECB just looks a bit clueless (and so are we).

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