ECB Praet poured some cold water on ECB rate cut expectations which arose after last week’s ECB press conference. In an interview with the WSJ, he stressed there is little room of manoeuvre for the ECB given the very low interest rate level. He added that the main issue currently is the proper functioning of the transmission mechanism, on which the ECB should continue to focus. On the possibility of a negative deposit rate, he was very cautious even if he too confirmed that the ECB is technically ready for it. There is little experience with such negative rates and it might have an adverse effect on bank lending conditions.
He also explained why the ECB didn’t see a change in the inflation outlook despite the rather sharp decline in the Staff forecasts. The Staff forecasts don’t take indirect tax increases into account which the ECB expects in 2013 to cut deficits. Conclusion, a rate cut is not a done thing yet. ECB Praet, member of the ECB Executive Committee might have been send out to rectify markets’ view on the possibility of a rate cut, also because of his comments on inflation. However, this might also been his personal opinion. For now, we still think that a refi-rate cut will take place in the first quarter. Chances on a deposit rate cut are materially smaller. However, today the shorter end may take note of his comments and thus underperform.