We had expected today's Governing Council meeting to focus heavily on the provision of bank liquidity, and in this context the decisions were bolder than we had expected. In particular, there will now be two three-year LTROs (longer-term refinancing operations), and a halving of reserve requirements (from 2% to 1% of eligible deposits, which apply to around EUR10trn of deposits). Reserve requirements currently amount to around EUR206bn and so this is a significant increase in available collateral to banks.
 
The economic assessment remained downbeat, and we see a strong likelihood that the next set of staff macroeconomic projections - due to be published at the time of the 8 March 2012 Governing Council meeting - will be revised down further. For example, the midpoint for 2012 real GDP was revised down from +1.3% to +0.3%, whereas our latest projection is -0.2%. The 2013 GDP projection was at 1.3%, similar to our expectation of the staff projection, but lower than our BarCap forecast (1.0%). Meanwhile, the 2012 HICP midpoint inflation projection was revised substantially to 2.0% from 1.7% in the previous September staff projections, and therefore similar to the BarCap forecast (2.0%), but a stronger revision than we had expected. However, the 2013 HICP inflation projection was only 1.5%, in line with our expectation (but this assumes a stable path for commodity prices and no further major indirect tax increases).
 
Overall, if our projections hold true, then the Governing Council will continue to be surprised on the downside concerning 2012 activity, and so will continue to lower the policy rate in Q1 (our baseline is still 25bp reductions in January and February). That said, Mr Draghi stressed that today's discussion on monetary policy had been between those who wanted a 25bp cut and those who did not, ie, no-one pressed for a 50bp reduction. While we find this surprising, nonetheless, the relatively small range of discussion probably stems from the fact that current inflation is relatively high and that the 2012 projection was revised up by 0.3pp. This implies that there is uncertainty about how ready the Council will be to announce a further 50bp of interest rate reduction during Q1 (although Mr Draghi said, in response to a question on whether there might be a floor on the main policy rate, that "we do not pre-commit").

source: BarCap