ECB Kept All Policy Rates Unchanged, No New Measures Introduced

The discussion in the Governing Council was not on whether to cut rates or not. Instead, focus was on whether there had been enough changes to warrant action and the conclusion was that this was not the case, as changes were not sufficiently in one direction.

• Mario Draghi tried to perform his ‘verbal intervention trick’ again and talk rates down by keeping the door open for further action and mentioned the many instruments the ECB has ready on its shelf, albeit without giving a signal of a rate cut next month. On negative rates, Draghi said the Council did discuss this and reiterated that the ECB is technically ready. He also reiterated said that there are unintended consequences.

• The market reaction was most pronounced when Draghi warned politicians that fiscal prudence is still needed, otherwise the market will punish them. Specifically, he said, ‘so, if one country just gets two years of extension, and then in two years’ time comes back with high deficit, higher level of debt and the same degree of competitiveness, that is to say very little. I don’t think the markets will be happy and will punish very soon this country or other countries like that’ and ‘don’t get too optimistic about the present market condition. Don’t interpret the present market condition as one that would allow any protracted relaxation of fiscal standards without undertaking structural reforms at the same time without increasing competitiveness. That is the message that I have’. The market reaction reflects a concern that the indirect message is that if governments cause themselves new trouble, the OMT will not be available. We think that the market overreacted a bit – this was probably meant as a much-needed warning to politicians to keep up the reform pace, rather than a signal to markets about the OMT's limits.

• Draghi tried to talk down expectations of an SME instrument. He said that packaging SME loans into ABS is difficult, and added that it is not for the short term anyway. He also emphasised that one reason that banks do not lend is risk aversion and indeed some sectors needed downsizing. This certainly did not sound as if the ECB is about to present an impressive instrument for SMEs. Our expectations are that if the ECB comes up with an instrument for SMEs at all, it will most likely be underwhelming.

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