Thursday, June 6, 2013

ECB leaves its tools on the shelf

Back on hold. As expected, the ECB kept interest rates on hold at today’s meeting. ECB president Draghi tempered expectations about a quick fix for SME lending but also made clear that the ECB stood ready to do more on the rate front if the economy does not bottom out in the near future.

As ECB president Mario Draghi said it himself: macro-economic developments since the last meeting did not change enough to trigger an additional ECB action. In fact, the ECB’s macro-economic assessment remained broadly unchanged from last month and showed many verbatim similarities. While confidence indicators have improved somewhat, the ECB remains cautious on the expected recovery. For the time being, the ECB continues to expect a bottoming out of the economy in the course of the year, followed by a very gradual recovery. This almost unchanged assessment is also reflected in the ECB staff’s latest projections. As regard growth, ECB staff revised its projections downwards for this year to -0.6% (from -0.5%) and upwards for next year to 1.1% (from 1.0%). Main drivers of the hoped for recession recovery remain external demand, low inflation and loose monetary policy. As regards inflation, ECB staff now expects 1.4% this year (from 1.6%) and 1.3% (unchanged) for next year.

As regards any future policy measures, ECB president Draghi kept all options open but also tempered expectations about a quick ECB fix for the real economy. According to Draghi, the ECB was technically ready for negative deposit rates. At the same time, however, he also stressed that negative deposit rates would have unintended consequences. For the time being, a negative deposit rate still falls in the category “OMT”: an announcement or threat which the ECB hopes will never have to be implemented.

In our view, the ECB will try to avoid negative deposit rates for as long as possible. In case the Eurozone economy does not bottom out in the next one or two months, another “traditional” rate cut seems to be the most preferred option. Given Draghi’s comments today, even a refi rate of 0%, while keeping the deposit rate also at 0%, should not be excluded if the economy falls short of stabilizing.

On the often-discussed stimulus for SME lending, Draghi clearly backtracked, remarking that the plan to support asset-backed securities was a medium to long-term proposition and nothing for the short term. Judging from his comments, we still think that the ECB would be willing to eventually purchase ABS in the market but only if and when (parts of) the risk have been taken over by for example the European Investment Bank or similar institutions. As any such plan still requires more negotiations between the European institutions, the only short-term relief the ECB could offer would be a relaxation of its collateral rules.

Over the last two months, the ECB had increased expectations that it would be able to present a new quick fix for the real economy by boosting SME lending. Today’s press conference shows that the ECB has returned into its garage, carefully studying what is left there. As ECB president Draghi said, there are still a couple of tools on the shelves. However, it is obvious that all of these tools have a “highly dangerous warning” sign on them. If need be, the ECB would use any of these tools. For the time being, however, the ECB looks happy keeping the dangerous stuff where it is: on the shelves.

Carsten Brzeski

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