Draghi's Just Warming Up

The ECB kept all rates unchanged. The Governing Council did discuss rate cuts extensively, but consensus was for the time being not to look at cutting rates. The Council also discussed a variety of other measures including a programme for SMEs.

We expect the ECB to deliver non-standard measures at the meeting in May. Several times during the Q&A Mario Draghi said that the ECB will look at possibilities for using non-standard measures within its mandate and that it will look at experiences from other countries. He is most likely referring to the Funding-for-lending programme of the Bank of England.

We think the reason why the ECB did not deliver any stimulus measures at this meeting is that it needs to make sure that it is feasible within its institutional setup. Added to this it will ensure the measure will work effectively and as Draghi concluded, the experience suggests that the ECB needs to think deeply.

Draghi also opened the door for the ECB to deliver a rate cut in May, as he said "we will monitor very closely". The possibility of a rate cut was further supported by Draghi indicating that the economic outlook is fragile across the euro area as he pointed out that the weakness is extending to countries without fragmentation.

An argument for the ECB to leave rates unchanged at the coming meeting is that a cut will largely affect the German economy, where there is a risk of increasing prices and bubbles in some asset classes.

In contrast to a rate cut, non-standard measures could be targeted at the countries where the monetary mechanism remains broken and where stimulus is much needed. In that perspective the ECB will analyse why the things it has done so far do not work in some countries.

Added to our expectations of the ECB presenting non-standard measures at the coming meeting, Draghi's soft tone has opened the door for a rate cut. Even though a cut cannot be ruled out, we think Draghi's wording points in favour of non-standard measures. The opening for non-standard measures and rate cuts followed after Mario Draghi had softened his view on economic outlook in the introductory statement, as he said "... a gradual recovery is projected for the second half of this year, subject to downside risks". At the meeting in March he said that "available data (...) broadly confirming signs of stabilisation in a number of indicators, albeit at low levels".

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