He feels that any hopes that the ECB might signal an intention to provide the euro-zone economy with additional support over the coming months will have been severely dampened by today’s post interest rate announcement press meeting. President Draghi listed a number of recent positive developments in the currency union, including the stabilisation of some economic indicators, the improvement in financial market confidence, a fall in current account imbalances, a fall in TARGET2 balances, and a drop in bank loan redemptions.
At the same time though however, Loynes highlights that Draghi conceded that most of these developments have yet to feed through to he real economy and that the risks to growth remain on the downside. He also declined the opportunity, when asked, to say that the debt crisis has reached a turning point.
He writes, “Despite this, however, he gave no impression at all that the ECB is about to provide additional policy support, conventional or unconventional. Unlike in December, when some Governing Council members had voted for a cut in interest rates, the decision to leave rates unchanged today was unanimous and Draghi would not even confirm that a rate cut had been discussed.”
At the same time, Loynes notes that he rejected the suggestion that the ECB should follow other central banks like the US Fed and Bank of England in re thinking their policy objectives, insisting that the ECB has a mandate to preserve price stability and has “shown how to meet it”. He notes that Draghi also shrugged off suggestions that the ECB was losing out in not thinking about how to lower the euro exchange rate and that it should be taking action to tackle the fragmentation of euro-zone labour markets.
Finally, Draghi gave little assurances again regarding the potential effects of the ECB’s Outright Monetary Transactions (OMTs) programme, re-emphasising that its implementation would depend on an “independent assessment” by the Governing Council and dodging a question on whether Ireland now qualifies for OMTs after its recent bond issuance.
Overall, Loynes feels that the strong message was that the ECB is content for now to use the breathing space afforded to it by low level of government bond yields to leave the onus firmly on euro-zone governments to tackle their own problems through fiscal and structural reform. Another cut in interest rates and/or the adoption of more non-standard monetary policy measures like quantitative easing therefore appear to be firmly off the near-term agenda.
However, he concludes by writing, “if we are right in expecting the news on the economy to remain very weak, prompting market concerns over the outlook for the highly indebted peripheral economies to re-escalate, then it is surely only a matter of time before the ECB will be forced to put its money where its mouth is and fire the OMT bazooka. The risk of disappointment remains high.”