The ECB in wait-and-see mode

Yesterday’s press conference held in Slovenia did not add much new information. It was mostly an occasion for Mario Draghi to clarify some aspects of the Outright Monetary Transactions (OMT) programme. It confirmed that the ECB has entered a wait-and-see mode that could unnerve financial markets if the Spanish government does not soon take the decision to ask for aid and so trigger OMTs. We continue to consider that OMTs being triggered under market pressure is a worse outcome than a request for aid during periods of relative calm.

Hope of a rate cut dashed
Yesterday, the ECB Governing Council (GC) decided to leave the key ECB interest rates unchanged. Mario Draghi dashed hopes of further rate cuts in the near future as he hinted that there was no discussion of monetary relaxation at yesterday’s meeting. Moreover, he stressed that long-term inflation expectations were firmly anchored so there was no necessity to soften the current policy stance.

We do not remember ever hearing a clearer commitment on future monetary policy. We need to take this new piece of information into account. As a result we are dropping our forecast of a 25bp rate cut in Q4. In our view, this also closes the door on the possibility of a negative deposit rate in the near future. As a consequence, the Refi is likely to remain unchanged in Q4 but we still believe a rate cut is possible in 2013 as economic conditions are likely to remain very adverse in the months ahead.

No hints on measures to transform liquidity into credit
As for the rather technical question of differentiating interest rates on current account between deposits in mandatory reserves and other deposits, not a single word was said on the subject, so we consider it very unlikely that there will be a rapid change of policy in this respect. As a consequence, the ECB appears to accept the current situation, where large amounts of liquidity are being hoarded by banks.

OMT rationale reaffirmed
The press conference was an opportunity for Mario Draghi to stress certain points regarding OMTs. He now states that:

  • The OMTs will provide a fully effective backstop to avoid destructive scenarios
  • By deciding on OMTs, the ECB acts strictly within its mandate to maintain price stability over the medium term
  • OMTs will not endanger the ECB’s independence
  • The euro is irreversible
  • The GC is ready to undertake OMTs, once all the prerequisites are in place
  • OMTs will be undertaken as long as programme conditionality is fully respected
  • The GC will exit from OMTs once their objectives have been achieved or when there is a failure to comply with a programme
  • OMTs would not take place while a given programme is under review

Regarding the conditionality that is attached in order to obtain ECB intervention, Mario Draghi stressed that this is an essential part of the framework to provide a fully effective backstop, as:

  • It reduces moral hazard for Governments
  • It protects the independence of the ECB
  • It offers an incentive for governments to pursue the right policies

Countries under a programme need to achieve full access to the capital market
It also provided an opportunity to clarify an interesting point. Mario Draghi specified that countries complying with programme targets, such asPortugal, would be eligible for OMTs only when they have achieved full access to the capital market. This week’s Portuguese bond swap (short maturities exchanged for longer ones) is not regarded as full access. SoPortugal, as well asIreland andGreece, will face a longer wait for ECB interventions on their debt.

On the ECB as a centralised supervisor
Part of the conference was devoted to the prospect of seeing the ECB as the centralised supervisor for the euro area banking system, the so-called Single Supervisory Mechanism (SSM). But no significant information was divulged on the subject apart from obvious statements such as that the Governing Council is very aware of the necessity to implement a clear separation of the two tasks (monetary policy and supervision) within the ECB in order to avoid mutual influence. The ECB is working on these questions and is to issue an official statement of its position.

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