The ECB conducts a more cautious assessment

The tone during yesterday’s ECB press conference was slightly less upbeat than January’s. Accelerating disinflationary process, the impact of the euro’s strength, the fragility of confidence and the downside risks to the economic recovery, give the impression that the Governing Council has not closed the door for further easing measures.

As we continue to be very pessimistic regarding the periphery economies’ ability to recover without external help, yesterday’s press conference tends to comfort our scenario that ECB action will be necessary in 2013 in order to see the periphery economies get out of recession.

So we maintain our call for a 25bp rate cut and we continue to consider that non-orthodox measures will be necessary in order to reduce real interest rates in the periphery.

Cautious assessment on economic recovery
As expected, the Governing Council of the ECB decided to leave interest rates unchanged. Mario Draghi said that the decision was discussed but taken unanimously.

Regarding the regular analyses, Mario Draghi gave a rather cautious economic assessment admitting that “available data continue to signal further weakness in activity in the fourth quarter and at the beginning of 2013”. The Governing Council continues to expect “a gradual recovery” later in 2013.

The recovery should be supported by the ECB’s “accommodative monetary policy stance”, the improvement in financial market confidence, reduced fragmentation, and export growth. But the risks surrounding this scenario continue to be perceived to be on the downside. According to the ECB’s Governing Council, the ongoing improvement in confidence remains fragile and could be subject to reversal.

Euro strength mentioned
Regarding inflation, Mario Draghi’s wording has changed from “inflation rates are expected to decline further to below 2% this year” to “…below 2% in the coming months”. Moreover, he mentioned the appreciation of the euro exchange rate in the list of downside risks factors, which is worth mentioning since any explicit reference to the impact of exchange rate movements by the ECB is extremely rare.

The Governing Council considers that the weakness of loan dynamics reflects the current subdued business cycle and the ongoing adjustment in the balance sheets of the financial and non-financial sectors. LTROs repayments were also mentioned as possible factors favouring an interest rate increase. Even if this risk has been played down by Mario Draghi, it is comforting to see that the Governing Council considers that it is too soon to see market interest rates raising.

Ireland at the heart of the Q&A
Journalists insisted on obtaining a statement from Mario Draghi regarding last night’s decision by the Irish government to speed up the winding-up of Anglo Irish Bank in return for an agreement to replace the costly 28bn promissory notes that were used to bail out the bank in 2009. But Draghi remained unbending, repeating several times that the Governing Council just“took note of the Irish Government and Central bank decision”.

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