Viewpoint: In line with expectations, the ECB has cut the policy rate by 25 basis points to 0.50%

Another interesting aspect is also  that the measures on countries under financial distress, which are now subject to the imposition  of adjustment programmes by the Council, may in the future reduce incentives to delay requests  for the activation of precautionary programmes….…

The ECB  also extended full allotment at refinancing auctions until July 2014, but other than that the ECB ha  no major news. The ECB’s moves are not conducive to major changes for financial conditions in  the euro area, and in peripheral Member States in particular. Yet, the ECB has left the door open  on a further 25bp refi rate cut, and has not entirely ruled out lowering the deposit rate below zero,  an event that we continue to deem very unlikely. As regards non-standard measures, the ECB-BEI  task force is working at tools to revive the BAS market and possibly a purchase programme of  securitisations of loans to small and medium enterprises. Yet, news on this front are unlikely to  arrive any time soon.  

In line with expectations, the ECB has 1) cut the policy rate by 25 basis points to 0.50% and left  the deposit rate unchanged at zero. The rate on the marginal lending facility has been cut by 50  basis points to 1.0%, narrowing the refi rate’s fluctuation corridor. 2) The ECB has also announced  that it will keep full allotment in place on short-term refinancing operations until 8 July 2014. On  one-month and three-month operations, full allotment will stay in place until the end of 2Q 2014.  3) The statement says that an ECB-BEI task force is studying tools to revive the ABS market and to  promote the securitisations of loans to enterprises. Contrary to the indications provided by some  ECB Council members (in particular Praet last 17 April), the ECB did not revise downwards the  haircut on loans to non-financial enterprises.

The refi cut is justified by “low underlying price pressure… At the same time, weak economic  sentiment has extended into spring of this year”. Against this overall background, the trend of  monetary aggregates has remained sluggish. The ECB continues to expect a recovery in the second  half of the year, as global demand should support exports, and monetary policy should fuel the  trend of domestic demand. Risks to the growth scenario remain skewed to the downside, whereas  risks to inflation dynamics are broadly balanced “taking into account today’s decision”. In the ten  days running up to the May meeting, several ECB Council members questioned the efficacy of a  refi rate cut in supporting the real economy, but Draghi stressed that the ECB Council considers  that “standard” monetary policy measures are more effective, adding that they certainly will be  now for peripheral countries in which transmission  of monetary policy is defective. Draghi once  again stressed that the swift implementation of the European banking union is the key move to  help restore the transmission of monetary policy across Europe. The ECB President also underlined  progresses in reducing fragmentation, as made evident by: the improvement of TARGET II  balances;  smaller recourse to the ECB window, down by 400 billion euros between since July  2012; stabilisation in the dispersion of lending rates within the euro area; smaller expected  tightening of credit conditions, also in peripheral countries (based on the ECB survey of last 27  April); smaller percentage of rejected loans applications from small and medium enterprises (based  on the ECB and EU Commission survey of SMEs).

On the whole, the changes introduced by the ECB are rather predictable  and initially  disappointed expectations, driving the euro down to 1.3207. Only Draghi’s acknowledgement  during the press conference that a 50 basis point cut was discussed already at the May meeting,  and the openness shown towards a further possible reduction of the refi rate in the months  ahead, as well as a cut into negative territory of the deposit rate, eased pressures on the single  currency.

In our view, the ECB may implement a further 25bp cut between by July. Yet we continue to deem  unlikely a cut of the deposit rate below zero. Already in the past, Draghi showed openness towards a  cut of the deposit rate, yet he always underlined  it may have unintended consequences. This time  Draghi added the ECB stands ready to deal with the unintended consequence should the case for a  cut materialise.  We think it is unlikely that the ECB-BEI task force will introduce significant news on  the purchase of securitisations of loans to small and medium enterprises already in June. Draghi  repeated that the ECB cannot resort to asset purchases as other central banks do, as it is “not in the  business of monetizing the debt… or cleaning banks’ balance sheets”. Draghi also indicated that an  ABS purchase programme of loans to small and medium enterprises is a complex operation, as 80%  of financial intermediation for SMEs is managed by banks in Europe (unlike in the United States), and  uniform criteria must be identified to “package and price” these loans. This will obviously take time,  and in any case the ECB does not intend to take on its balance sheet the risks associated with such a  programme. This is why the ECB suggested such an operation will be managed more expertly by the  BEI and the EU Commission. All considered, we should thank the FED and the BOJ for keeping bond  rates low around the world. Indeed, Draghi made explicit reference to abundant capital inflows into  the euro area.

Appendix

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