ECB Meeting Updates – January 2012
The ECB left interest rates on hold, pausing to assess the impact of back-to-back cuts and a slew of other measures it unleashed late last year that are showing signs of helping fight the euro zone debt crisis.
“The extensive recourse to the first three year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence,” ECB President Mario Draghi told a news conference after it held its benchmark rate at 1.0 percent.
To help fight the euro zone debt crisis, the ECB provided banks with nearly half a trillion euros of three-year money in December, called LTRO, and will make a similar offer in February.
French President Nicolas Sarkozy has urged banks to use the cheap three-year loans to buy sovereign bonds of euro zone strugglers and strong debt auctions in Spain and Italy on Thursday suggested some may be doing that, with analysts saying abundant liquidity helped support demand.
The ECB sees signs of hope that the worst may soooooooon be over.
- However, the ECB ‘hint’s that it would cut rates again if need be.
- We raise our likelihood of a final 25 bps cut from 40% to 60%.
- The most likely month for such a rate cut is now March.
- ECB is ready to do its utmost to support banks…
- but remains reluctant to tackle the Euro crisis directly.
- At its January meeting, the ECB kept rates ‘on hold’ and maintained its general assessment: “the economic outlook remains subject to high uncertainty and substantial downside risks”, repeating key words from the December 2011, statement. However, the ECB also detected some signs of hope, including a recent stabilisation of confidence indicators and lower sovereign interest rates.
After 2 successive rate cuts back to the historical low of 1.00% in late 2011, the ECB today stayed ‘on hold’. But Draghi dropped 2 heavy hints that it may reduce rates further if the economic outlook were to worsen significantly. The ECB added a new sentence, explaining that “a very thorough analysis of all incoming data and developments over the period ahead is warranted”. This echoes the “strong vigilance” language which the ECB had used in the past to prepare for rate hikes. Asked about the possibility of a further rate cut, Draghi replied in the Q&A session that “we will monitor all developments and stand ready to act”.
This suggests that the ECB could cut rates further to 0.75% if financial tensions were to escalate. The central bank identified such tensions as the major risk to the economic outlook. Draghi offered words of praise for Italy and other countries “under stress” in the Eurozone. He praised the fiscal and structural reforms initiated in the last few months as “extraordinary”
- He also tried to reassure bond markets that the “private sector involvement”, that is the restructuring of Greek debt, would remain a unique event.
- None of Draghi’s comments today suggest that the ECB would be ready to directly tackle escalating tensions in sovereign bond markets.
So far, we had seen a 40% chance of a further 25 bps rate cut at the February meeting After the Draghi comments today and the confirmation yesterday that the Eurozone recession could spread further to Germany (we are now forecasting German GDP for 2012 at -.50% and for 2013 at -1.5%) in late 2011, we raise the probability for such a final cut to 60%. The most likely month for a cut is March 2012. Thereafter, the ECB will likely stay ‘on hold’ until the end of the year.