No surprises from the April meeting of the ECB’s Governing Council. Based on the statement and on President Draghi’s answers during the Q&A session, the ECB is ready to react to data; unfortunately, however, it is not clear how. The lack of transparency on potential new non- standard measures dampens the display of openness to an easing of monetary policy. …. ….
For professional investors and advisers only
The ECB has left policy rates unchanged. However, the tone of the statement and Draghi’s answers were markedly more accommodative than they were a month ago. First of all, Draghi admitted that the possibility of an interest rate cut was discussed, although the Council ultimately decided against such a move. Also, the ECB acknowledged the fact that weak economic activity at the end of 2012 has extended into the early part of this year, as opposed to the previously expected stabilisation. Also, while the ECB’s projection for a recovery in the second half of the year remains in place, it is subject to downside risks. Lastly, using an
expression à la Trichet, the statement assures that the ECB will “monitor very closely” developments in terms of data.
The ECB vows to keep monetary policy accommodative and to continue with full allotment at auctions “for as long as necessary”. In some ways, this represents “verbal guidance” of sorts, in the absence of other instruments at the ECB’s disposal to counter the effects of the crisis in hindering monetary policy transmission to peripheral euro area countries. However, if economic activity stays weak, and downside risks materialise, the ECB may intervene to step up monetary stimulus, or to attempt to restore its transmission to peripheral countries, where monetary policy remains restrictive, and small and medium enterprises only have access to credit at much tighter conditions than in core countries.
The ECB appears to be considering new non-standard measures, probably to attempt to encourage the concession of credit to small and medium enterprises, in the euro area periphery in particular, and that may involve NCBs. Unfortunately, it is not at all clear what form these measures may take on. During his press conference, Draghi specified that the Council discussed a number of measures, but failed to reach a conclusion, as its choices must fall within the boundaries of institutional limits and of the ECB’s mandate. Twice he mentioned the need to involve “other actors” in the process. Even if the ECB is “stands ready to act”, therefore, the President’s reluctance to explain how casts serious doubts on the fact that the Council really does have arrows in its quiver, as well as on whether the necessary consensus to use any of these arrows exists within the Council. In this difficult environment, a rate cut could play a role as a smoke-screen, if nothing more effective can be agreed in coming months.
The statement rightly stresses the importance of making progress towards achievement of the banking union, namely of the Single Supervisory Mechanism and the Single Resolution Mechanism. This is understandable, as at this stage the banking union is the only change which could unblock the circulation of capitals within the area. However, it is also a signal that the process is meeting with difficulties.
In conclusion, Draghi’s attempt to depict an ECB that is ready to act is unlikely to prove credible unless there is some willingness to come clean and explain how. As long as the ECB fails to do so, the markets are unlikely not to consider such statements as bluffs
Appendix
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