The ECB is “frustrated” and conventional
The ECB cut its main interest rate by 25bp to 0.5% and the rate on the marginal lending facility by 50bp to 1%. In addition, the ECB addressed the “hump in bank bond maturities over the next 15 months” by committing to keep the MROs as well as the shorter term LTROs as fixed-rate tenders with full allotment for as long as necessary but at least until mid-2014.
The rate cut was the least the market expected and does not seem unreasonable given economic weakness even in the core and subdued price dynamics across the euro zone (April 1.2% yoy). In addition, the stance on negative deposit rates seems to have softened significantly, adding to an easing bias. We expect another 25bp cut to the refi rate in July/August. However, neither Draghi nor anyone else believes that it will do much to foster growth quickly or decisively especially where it is most needed. Despite many signs that financial market fragmentation is receding it remains far from gone. Furthermore, committing to the mid-2014 date – somewhat new territory for the ECB – is unlikely to have much of an impact since an exit from fixed rate full allotment was not on the cards anyway. On unconventional policies to support SME lending possibly via the EIB Draghi was vague and this would in any case face material institutional and political hurdles. Finally, asked about his level of satisfaction with the transmissions of the ECB’s monetary policy to the real economy Draghi answered they were “frustrated”. Lending remained weak due to macroeconomic uncertainty and risk aversion on the demand and supply sides despite ample funding. As such, the frustration comment applies equally to the progress on the political (credible fiscal plans, structural reforms) and institutional (banking union) fronts. The ECB cannot do the governments’ jobs.
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Published with kind permission of Deutsche Bank Research.