ECB Masters Verbal Intervention‏

The ECB struck a dovish tone in its statement and press conference Thursday. It is becoming a master of verbal intervention as it managed to dampen recent de facto tightening without taking any action -- much as was the case with the OMT programme, which has so far managed to lower Spanish and Italian bond yields without buying a single bond.

The ECB views the rise in short rates as a sign of confidence but is ready to provide liquidity as needed. It will closely monitor conditions in the money markets.

On the euro exchange rate, the ECB now specifically mentioned it as a downside risk to inflation but otherwise the tone was balanced. The ECB will evaluate the effect on inflation in the new economic projections next month.

A Slightly More Dovish Tone
The ECB struck a slightly dovish tone as there were explicit changes to the statement on the back of the recent rise in short rates and appreciation of the euro. On the repayments of LTRO money and the rise in short rate: the ECB noted it reflected a rise in confidence and was at the discretion of the counterparties. The ECB will “closely monitor conditions in the money market and their potential impact on the stance of monetary policy, which will remain accommodative with the full allotment mode of liquidity provisions.” This is another example of verbal intervention from the ECB indicating that if short rates go up too much the ECB will likely respond. Draghi added at the press conference that he wouldn’t make too much of the EONIA increase but that the ECB was accommodative and would provide liquidity as needed.

Note that the message was essentially unchanged compared to the recent comments from ECB Executive Board member, Peter Praet, who on 29 January said, “We will exert vigilance to ensure that ... the overall liquidity conditions prevailing in the money market will remain consistent with the degree of accommodation that the current outlook for prices and real activity warrant”.

On The Strengthening Of The Euro, the tone also signalled “monitoring” but without saying it explicitly. Firstly, the ECB now added the euro as a downside risk to inflation. Secondly, it actually also indirectly hinted at the euro when speaking of downside risks to growth as it now also sees these as stemming from the possibility of weaker-thanexpected exports.

Since global growth data has generally been strengthening it is hard to see this otherwise than a risk from a stronger euro.

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