Central Bank Outlook: ECB Expected Rate Cut Materializes

Posted July 5, 2012 by Editor

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• In a unanimous decision, the ECB Council cut all its main rates by 25 bp, the first such move since the end of last year.  As a result, fresh record lows are now being seen in the refi rate (at 0.75%) and the deposit rate (at zero), the latter decline presumably done to discourage hoarding of cash at the ECB.
• Draghi noted that some downside risks to growth had materialized, easing inflationary pressures. However, the ECB is sticking to its June projections of a slight contraction in 2012 and clear growth in 2013—significantly more optimistic than the DE view of -0.8% growth this year.
• If growth fails to recover in 2013, inflation will also be decidedly lower than projections, bordering on deflation risks. In this regard, the question is whether this conventional cut of 25 bp will do much to alleviate these emerging deflation risks.  If not, then the refi rate may be cut further, but with the clear implication being that more unconventional policy moves may be needed, with the ECB having a clear economic rationale for resuming bond purchases over and beyond any need to buy time for politicians.

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