The outcome of the ECB’s first policy meeting of 2013 was in line with market expectations, with no change to policy. While the December meeting and statement indicated a shift to a more pessimistic view on the outlook, today’s statement and subsequent comments from President Draghi stressed some of the positive developments that have been experienced in financial markets in recent months. The statement itself made reference to the reduced “fragmentation” in financial markets, while in the Q&A session, President Draghi listed a plethora of indicators such as bond yields, country credit default swaps and stock markets, that have recorded improvement over the last six months. He summed up the list of indicators by saying “all in all, fragmentation is being gradually repaired”
During the Q&A section of the press conference, President Draghi said that the decision to leave rates on hold was unanimous. When questioned on whether there had been any support or discussion within the Governing Council for a rate cut, Draghi repeated that the decision had been unanimous and added that this “implies no request” for a rate cut. This is in contrast to the December meeting, where there had been a wide discussion on cutting interest rates.
In justifying the Governing Council’s decision not to cut interest rates, President Draghi noted that the Governing Council saw no reason to change their medium term outlook for price stability and therefore it was the Council’s unanimous view to leave rates unchanged.
On the issue of other policy measures, namely the potential for more longer term liquidity provisions from the ECB, President Draghi played down the prospects of more LTROs in the near term. He noted that the ECB view funding conditions as satisfactory and that they do not see the same potential for systemic risks to the banking sector that were present when they previously implemented the two 3 year LTROs.
Overall, the key take away from today’s meeting is that the easing bias within the ECB is now weaker than it had been at the December meeting. This is illustrated in the fact that today’s decision not to cut interest rates was unanimous, and there was no support within the Governing Council for a rate cut, unlike at the December meeting. The weaker easing bias was also illustrated by Draghi’s keenness to stress the positive developments in financial markets, the broad stabilisation of several conjunctural indicators (e.g. PMI’s) and reduced fragmentation.
On the FX markets, the weaker easing bias of the ECB has provided a boost to the euro, with Eur/USD moving from $1.31 up to $1.32 during the press conference, and has managed to hold around the $1.32 mark since then.
In terms of the outlook for monetary policy, the ECB still retains an easing bias, as it continues to view the risks to the growth outlook as lying to the downside. However, as discussed above, this easing bias is now weaker, as the Governing Council has taken encouragement from the improvements in financial market conditions and the broad stabilisation in several “conjunctural” indicators. The outlook for interest rates remains very much dependant on the economic outlook and the evolution of the euro zone debt crisis. We continue to think that a rate cut could be delivered at some point owning to the downside risks to the economic outlook. This is based on our expectation that there are further stress points in relation to the debt crisis, linked to ongoing difficulties in Greece, which could result in a renewed deterioration in financial market conditions and in turn negatively impact on economic activity.
In summary, the ECB retains an easing bias, but this bias is now weaker, implying no rate cut is imminent in the near term.