ECB: Ready to Act (on Rates)?

Posted June 6, 2012 by Editor

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• Surprising few, the ECB Council kept policy on hold for a sixth successive month, retaining the high-profile refi rate at 1.00% and the deposit rate at 0.25%.
• Notably, President Draghi used the Q&A session to reveal that the Council decision had seen a discussion, and some dissent, in favor of a rate cut at this juncture.
• Draghi underlined that the ECB had taken note of the run of negative data seen in the last few weeks and was ready to act, albeit playing down any hints about the resumption of bond purchases and/or a fresh LTRO.
• With an admission that its own forecasts were out of date, the ECB is starting to anticipate an inflation rate closer to 1% next year.  This is change more and more consistent with it having a clear rationale for more stimulus soon given that its remit is to preserve price stability, to guard against downside price risks as well as those to the upside.
• The question is whether a conventional cut of 50 bps would do enough to alleviate these deflation risks.  If not, then surely more unconventional policy moves may be needed.  The ECB is now gaining the clear economic rationale for resuming bond purchases over and beyond any need to buy time for politicians to decide upon the kind of reforms to the likes of the banking sector that are now being (belatedly) discussed.
• DE Outlook: A 50 bps rate cut next month is expected, and maybe sooner if downside risks flare up in the aftermath of the Greek election.  Resumed bond purchases also envisaged.

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