- The ECB kept the leading interest rate unchanged at 1% as widely expected. We continue to expect the ECB to keep the refinancing rate unchanged until Q1 14. The chance of more rate cuts in this easing cycle has diminished further.
- At the press conference, ECB President Mario Draghi cherished the effect of the 3Y LTROs and pointed towards the change in market sentiment since November. Draghi stated that the LTROs have been an “unquestionable success”.
- The quarterly staff forecast on inflation was revised upwards while the growth
- forecast was revised down. It is surging energy prices in particular that have pushed up inflation.
- On previous occasions oil price increases have prompted the ECB to hike rates. We believe that Draghi will abstain from this knee-jerk reaction as he appears to put more emphasis on the fact that price pressures should remain limited in an environment of subdued growth.
- The market reaction was muted as the ECB delivered as expected. ECB on hold for some time to come
The ECB kept the refinancing rate unchanged at 1% as expected by most analysts. At the press conference Mario Draghi highlighted that “survey indicators confirm signs of a stabilisation in the euro area economy”.
What attracted the most attention was the emphasis Draghi put on the positive effect of the LTROs. The LTROs “have contributed to a significant improvement in the financial environment over recent months. We expect that the three-year longer-term refinancing operations will provide further support for the ongoing stabilisation in financial markets and, in particular, for lending activity in the euro area”. Mr. Draghi did not signal any additional LTROs, so it seems that the ECB is happy with its existing non-standard measures and that no changes should be expected in the near term.
We continue to expect that the ECB will keep its leading interest rate unchanged at 1% until 2014. Mr. Draghi stated that a change in the leading rate had not been discussed. In our view, the likelihood of a rate cut has diminished further and the ECB will be on hold for a very long time.
Lowering growth and increasing inflation expectations
The ECB quarterly staff growth projections were revised significantly down for 2012. The staff forecasts average GDP growth of -0.1% in 2012 (down from 0.3%) and growth of 1.1% (previously 1.0%) in 2013.
The ECB inflation projections were revised substantially upwards, with primarily increases in energy and indirect taxes. For 2012 it was revised up to 2.4% (from 2.0% in December). The staff expects inflation to drop to 1.6% in 2013.
As the effect on inflation is expected to be temporary and the medium-term inflation outlook remains unchanged, current inflation should not be a concern for the ECB.
LTROs – it’s all good
The ECB president was very clear about his view on the LTROs. The effect has been “an unquestionable success!” The two LTROS have implied that markets have reopened and that we can now see signs of renewed confidence in the euro with real money investors returning. Draghi almost performed a “victory dance” to celebrate his achievements.
The LTROs have not only benefited the peripherals. Draghi stated that 460 German banks used LTRO II, but took on average small amounts. So, the banks are now closer to the SMEs. This argument has been used before, but really the main impact we have been able to see so far has been a helping hand to the interbank markets and in particular the sovereign bond market.
Draghi was also asked about his stance on the collateral rules. He stated that the tightening of collateral rules had not been discussed and that they in fact could be much looser. Draghi emphasised that the very high haircuts applied to reduce riskiness on additional claims were the same as to standard collateral.
The ECB president strongly emphasised that there is no profound disagreement between the Bundesbank and himself.
Market reaction
The market implication was muted following the “wait-and-see meeting”. Market sentiment has been improving since Wednesday on expectations that the support for Greek debt swap will pass the 75% threshold. EUR/USD is broadly unchanged compared to before the announcement. Also, German bond yields are broadly unchanged and equity indices moved little.