After the fireworks of the past couple of months, yesterday’s European Central Bank meeting passed off relatively quietly. As expected, key interest rates were left unchanged. Indeed, the main message from the regular monthly press conference that followed the ECB’s Governing Council meeting is that the ECB now wants to assess the impact of the aggressive actions it took before Christmas before it would be willing to contemplate further policy changes. So, unless there is a dramatic deterioration in economic or financial conditions, another near term rate cut or other radical action seems unlikely. Economic concerns have eased… slightly. Although yesterday’s ECB press statement refers to ‘tentative signs of stabilisation in activity’ it did acknowledge this was occurring at ‘low levels’. It also repeated last months assessment that ‘substantial risks to the downside continue to exist’. So, the ECB remains acutely aware of the fragility of the Eurozone economy at present. Mr Draghi emphasised the degree of uncertainty in the current environment and said the ECB ‘stands ready to act’. So, Mr Draghi is signalling the ECB is not out of ammunition, but equally it is not ready to fire another salvo at this point. In this regard, Mr Draghi referred to the difficulty in assessing ‘average’ euro area conditions when he referred to the ‘heterogeneity’ of conditions across the single currency area. This could also hint at some differences in the assessment of current conditions by different members of the Governing Council.
Highlights
• Risks still seen to downside but ECB in no rush to move again.
• Mr Draghi’s confident explanation of ECB stance should help to buy time.
• Key focus now on liquidity conditions and impact of recent ECB measures.
• December liquidity measures seen preventing further deterioration in banking sector rather than prompting early improvement in lending environment.
• We think further weakening in Euro area economy and an easing in inflation could prompt one more 25 basis point cut but this may be some distance away
Complete analysis available in the section ECONOMY/ANALYSES/KBC Flash.