ECB Watching: Cold turkey in the New Year?
by Julian Callow, Barclays Capital Research
The ECB today lowered its policy rate by 75bp, taking it down to 2.5%. We and a minority of economists had expected this move, while it was also anticipated by the Eonia market. While we continue to look, as our baseline, for a further 50bp policy rate reduction in January (taking it down to 2.0% from 2.5%), as is still the markets' expectation, Mr Trichet signalled that a January rate cut is by no means a foregone conclusion: whereas in the previous (November) meeting Mr Trichet had clearly signalled that a policy rate cut was "possible", today he explicitly refrained from giving any such signal concerning the January policy meeting. [Indeed, Luxembourg CB Governor Mersch commented later that the ECB was returning more to the territory of 25bp changes to the policy rate].
Mr Trichet was at pains to emphasise that the Governing Council wished to see the full impact of its 175bp of easing since October 8th translated through into a significant reduction in the "effective" lending rates by the banking sector. Moreover, in our view there was a hint that yet another set of new operational procedures might be adopted by the Council during the next fortnight as the ECB continues to try to do all it can to bring down Euribor/OIS spreads.
Today's Introductory Statement was broadly as might have been expected, with talk now of "balanced" inflationary pressures and downside risks to an ultra-weak GDP projection for next year: the first time the ECB staff have ever forecast a contraction in annual GDP: -0.5% (cut from 1.2% in the Sept. projections). Moreover, the latest staff projections revised down the mid-point projection for 2009 euro area HICP inflation to 1.4% (from 2.6% in September), a bigger downward revision than we had expected, while they also projected a very weak recovery in real GDP: growth of just 1.0%.
It seems that the current stance of the ECB might be that they would rather address the blocked credit transmission process rather than plunge into aggressive further monetary easing. If it does announce new measures, what form might they take? In some respects, the ECB has done such a lot, in terms especially of providing dollar swap facilitie and dollars via the Fed's TAF auctions, and in offering unlimited financing for banks at three and six month operations at a fixed rate equal to its policy rate.
One measure that the ECB might yet introduce across the euro area might perhaps be along the lines of that implemented by the Italian central bank on 13 October - a "TSLF"-type facility which enables temporary swaps between government securities held by the BdI and assets held by Italian banks (under the BdI's €40bn facility, such transactions are renewable, have a one month maturity and are remunerated with an annual fee of 1%, while banks can swap debt instruments in various currencies and with a rating below that of eligible ECB collateral).
Finally, when asked about the potential for quantitative easing, Mr Trichet replied that the purchase by the ECB of assets "is possible" but added that he had "no further indications to give. We are looking at the situation as cautiously and attentively as possible."
source: Barclays Capital Research | |