Highlights:
- ECB re-introduces a range of measures to support liquidity and leaves rates unchanged.
- ECB initiatives notably less radical than today’s step up in Bank of England asset purchases.
- ECB focussed on functioning of financial system - other support for economy will have to wait.
- Splits in ECB may mean rate cuts not as automatic or early as market expects.
- ECB belatedly recognises problems in financing conditions but today’s move unlikely to make a dramatic difference. Are they waiting on a new EU initiative?
Although some in the market may have been disappointed, today’s ECB decision to leave its key interest rates unchanged but to introduce a number of measures to address liquidity problems was broadly as expected. There is little doubt that the Euro area economy faces major difficulties. As has been the case in the past, the ECB may be on the slow side in recognising and responding to such risks. Equally, it is clear that sharply deteriorating conditions in the Euro area financial system are now at an altogether more critical point and the ECB is correct to prioritise a response to these concerns. However, it remains to be seen whether today’s initiatives can make a material contribution to a turnaround in the financial system.
Mr Trichet’s comments today suggest he leaves a seriously split ECB Governing Council when he steps down as President at the end of this month. This means that it could take a marked further deterioration in economic conditions and/or a sharp easing in inflation to allow an early rate cut. We also think that in contrast to the US Federal Reserve or the Bank of England, the ECB feels that it primarily is up to Governments to deliver the changes that will lead to a turnaround in the economy and the financial system. On this interpretation, the ECB might be prepared to reward what it views as the adoption of appropriate measures at a European level with a rate cut in the months ahead.
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