Thursday, May 2, 2013

Chill-pill from Bratislava

The ECB cut the main refinancing rate from 0.75% to 0.5% and the marginal lending rate – the rate at which banks can borrow overnight – from 1.5% to 1%. At the same time, the ECB left the deposit rate unchanged at 0%. The long-awaited relief for SMEs was not presented, yet, only hinted at.

Listening to the ECB’s macro-economic assessment, hardly anything seems to have changed compared with the last rate-setting meeting in April. As regards the economic analysis, the only change was the ECB’s acknowledgement that the economic weakness had extended “into spring”, compared with “into the early part of the year” in April. Interestingly, for the first time, labour market weakness made it into the ECB’s introductory statement. Cynics could argue that the ECB is moving further towards the Federal Reserve’s dual mandate.

As regards the inflation outlook, the ECB took note of the latest drop in headline inflation to 1.2% YoY but still sees risks to the outlook for price developments as broadly balanced.

Today’s rate cut mainly provides support for peripheral banks and could boost confidence marginally. However, to some extent, today’s rate cut does not fully fit into the ECB’s normal pattern of forward-looking policy. Judging from Draghi’s comments and taking them at face value, the rate cut was rather motivated by lagging than by leading indicators.

Next to the rate decision, a lot of market attention was on any ECB action to restore SME funding. Here, the ECB announced that the fixed rate tender procedures will continue to be conducted with full allotment at least until 8 July 2014. Although the ECB always love to state that they never pre-commit, this announcement is the boldest signal of long-term commitment to accommodative policies for a long while. In the past, unlimited liquidity had been promised for around six months. Now it is for another 14 months. Finally, on the real heart of the matter, the ECB announced that it has started consultations with other European institutions “on initiatives to promote a functioning market for asset-backed securities collateralized by loans to non-financial corporations”.

Although it remains very vague what the consultations with other European institutions could actually deliver, it is obvious that this is the step to tackle the SME lending problem. Draghi explicitly referred to the European Investment Bank (EIB) as the most important counterpart. This makes the option that the EIB guarantees SME loans, which in turn can then be used as collateral at the ECB, still the most likely outcome of these consultations. However, let’s not forget that the EIB has also access to the ECB’s liquidity facilities and might eventually buy SME-loans directly. The latter would obviously come close to a Eurozone-style quantitative easing. Draghi’s comment that “we are far from reaching any conclusions”, however, show that SMEs in peripheral countries still have to be patient before possibly receiving some relief.

In April, ECB president Draghi talked about his 360 degrees view on all possibilities. Today’s meeting confirms that the bright minds in the Eurotower are still working hard to come up with a new magic bullet. In the meantime, the only thing Draghi found in his toolkit was an old tool and a chill-pill to keep markets happy in the waiting room.

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