As expected, there were no policy changes announced by the ECB today but the Governing Council has clearly taken on board the recent signs of the deterioration in the economic outlook noting that the recent data “does not signal improvements towards the end of the year” Governing Council now expects the growth momentum to “remain weak” next year and removed the reference in the statement in relation to a “gradual recovery” highlighting the shifting view within the Governing Council to a more pessimistic one on the economic outlook.
…This more pessimistic view is likely to be reflected in the December staff forecasts President Draghi clearly flagged a downgrade to these staff growth forecast in the press conference. The ECB now stands ready to act not only on its non standard measures (i.e. OMT) but now also on its standard policy instruments meaning the chances of a rate cut are now higher and a rate cut as early as next month cannot be completely ruled out.
Today’s meeting of the ECB’s Governing Council as expected saw no change to policy. However, the statement and subsequent press conference did indicate a shifting view amongst the Governing Council in relation to a more pessimistic view on the economic outlook. At the same time, the Governing Council did point out the improvement in market confidence in recent months, owing in part to the positive impact from their OMT announcement back in September and the encouragement they are taking from these improvements in financial market conditions.
It is clear from today’s meeting that the Governing Council has noted the deterioration in the economic performance of the euro zone since their last meeting back in October. The introductory statement acknowledged this, referring to the fact that the available indicators continue to signal weak activity and that the most recent survey data “does not signal improvements towards the end of the year” for the economy. The Governing Council now expects the growth momentum to “remain weak” next year and removed the reference in the statement in relation to a “gradual recovery”.
In the press conference, President Draghi noted that the Governing Council’s economic outlook is being revised, and that the picture of economic weakness is bound to have an influence on the December staff forecasts, clearly flagging the likelihood of a downgrade to these forecasts next month.
A slight offset to the dovish tone on the growth outlook from the Governing Council, was in relation to the downside risks to inflation and the omission in this month’s statement of the line referring to the potential for the risks to the inflation outlook to be tilted to the downside if there was a lack of effective action by policy makers to deal with the debt crisis. The context of this omission is probably most appropriately viewed as the Governing Council being less worried about tail risks and the potential negative impact from these risks on both the growth and inflation outlooks.
One disappointment from today’s press conference was the lack of any direct questioning by the assembled media on the issue of whether a rate cut had been discussed by the Governing Council and if so, whether the decision to leave rates on hold was unanimous. Instead a fair chunk of the questions were focused on the issue of Spain. As at the October press conference, President Draghi reiterated the ECB’s stance that they “stand ready to act” but that it is entirely in the hands of governments if the OMT is to be activated. There were also some questions on Greece, and the ECB President had some positive comments on the recent developments in Greece, saying that the ECB welcomes the outcome of Wednesday’s vote and sees it a very important step and stated that it “really represents progress”.
In terms of the outlook for monetary policy, it is clear from today’s meeting that the chances of an interest rate cut are now higher. The introductory statement and subsequent comments from President Draghi indicate that the Governing Council is paying close attention to the recent deterioration in economic data in the region and President Draghi noted that the Governing Council “stands ready to act on standard policy instruments”. The reason for this more pessimistic/dovish shift in the Governing Council and its willingness to act is that the incoming economic news is telling them that the economy’s performance is weaker than they anticipated it would be. It is clear that this will be reflected in a downgrade to the updated staff forecasts in December. As we outlined in our latest Focus on Markets, in our view the current ECB staff forecast of 0.5% growth for 2013 looked overly optimistic and it now appears that the Governing Council is coming around to this view as well.
In summary, the ECB now stands ready to act not only on its non standard measures (i.e. OMT), but now also on its standard policy measures, meaning that the chances of a rate cut are now higher and a rate cut as early as next month cannot be completely ruled out.