A short report from Jürgen Michels of Citi provides a quick summary of the ECB’s statements today regarding interest rates.

As with many central bank announcements lately, there is much talk and little action.

The ECB left the refi rate unchanged at 0.75%, the marginal lending rate at 1.5% and the deposit rate at 0.0%. According to the ECB President, the rate decision was unanimous, but they also discussed whether to lower rates. Asked about negative deposit rates, Mr. Draghi said that this would be “largely uncharted waters”. The ECB did not alter its assessment of the economic and inflation outlook much, but
added “A further intensification of financial market tensions has the potential to affect the balance of risks for both growth and inflation on the downside.”
In line with Draghi’s London speech, the statement says “Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.” This statement had unanimous support. But, Bundesbank President Weidmann opposed the statement that: “The adherence of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its
mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.”
In the Q&A, Draghi said that governments have to go to the EFSF/ESM first (necessary condition) before the ECB would use the new facility, but stressed that being under an EFSF/ESM program is not sufficient (ECB independence).
In the Q&A session, Mr. Draghi said that the difference to the existing SMP program would be that the purchases would be based on conditions and that it would be transparent in respect to countries and amounts. He also said that the secondary market purchases would focus on the shorter end of the yield curve and that it would be not decided yet if the purchases would be sterilized. In respect to the ESM, Mr. Draghi said that under “current conditions”, the ESM would not qualify as an eligible counterparty for the ECB open market operations.
Comment: The planned new facility is broadly in line with our expectations, but disappoints market hopes for unilateral ECB action. It is now clear that without requesting support from EFSF/ESM, Spain and Italy will not get support from the ECB. As there are no details of the new program, it is difficult to compare it with the SMP. The main difference seems to be transparency, and there is a chance that the ECB will announce the amount of purchases in advance, but it remains unclear if
the amount will be large enough to impress markets. To us, it will be difficult for the ECB to sort the “seniority” problem. We reckon that the ECB will continue to sterilize the purchases, maybe through ECB bills or bonds rather than term deposits. We continue to see further rate cuts, down to 0.25% in the main refi rate and -0.5% in the deposit rate, by the end of the year.

 

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