Viewpoint: We do not expect significant moves from the ECB in 2013

Dez. 7, 2012

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We do not expect much from the ECB in 2013. As widely anticipated, the central bank left rates unchanged, although the new staff projections allow margin for an adjustment of rates in the first half of 2013……….

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Growth in 2014 is forecast at 1.2%, half a point higher than the EU Commission’s latest estimate of the potential rate. During the press conference, there was no indication of any further stimulus measures being in the pipeline for 2013, beyond the provisions of the government bond purchase plan already in place.

– As widely expected, the ECB left rates unchanged at 0.75% and did not announce changes in terms of non-standard monetary policy measures. However, the ECB extended full allotment to all refinancing auctions until the sixth maintenance period (9 July 2012), although the measure was taken for granted.

– We do not expect significant moves from the ECB in 2013, beyond the provisions of the OMTs plan already in place. The ECB is unlikely to move pre-emptively, adding monetary stimulus aimed at restoring correct monetary transmission in peripheral euro area countries. Institutional and ideological restraints will continue to condition the ECB’s choices. Another medium-long term refinancing operation seems highly unlikely in the first half of the year, as the ECB will want to at least verify how much of the 36-month liquidity will be returned in January. We expect the banks of core countries (Germany, France, Austria, Finland, Holland and Belgium) to repay up to 180 billion euros, a substantial sum that would in any case leave excess system reserves at just under 500 billion euros, a still sufficiently high level to leave the EONIA rate compressed at the lower end of the refi fluctuation range. The ECB may extend full allotment until the end of 2013, as we do not expect the interbank market to improve to such an extent as to allow peripheral country banks to forsake recourse to ECB refinancing.

– The new growth estimates left open a margin for an adjustment of the refi rate. Estimated growth in 2013 was revised from +0.3% in September to -0.3%, below the November consensus estimates (-0.1%) and the EU Commission’s projections (+0.1%). At the same time, the ECB also lowered its inflation estimate, to 1.6% from a previous rate of 1.9%. The assessment of the risks weighing on the macro outlook was virtually unchanged: skewed to the downside on growth, and balanced on inflation. In his press conference, Draghi said that an interest rate cut was discussed, but did not meet with sufficient consensus within the Council, as monetary policy is still considered to be accommodative and the drop in government and market rates triggered by the announcement of the ECB plan is making financial conditions less restrictive in peripheral countries as well. It should also be considered that the ECB’s initial estimates for 2014 point to an average growth of +1.2%, a level significantly higher than the EU Commission’s latest estimate of the growth (+0.6%). Inflation is forecast in the 0.6% -2.2% range. Therefore, the ECB does not rule put a potential drop in inflation below 1% if the economic cycle proves to be weaker than expected. All considered, we continue to believe an interest rate cut in 2013 may only meet with sufficiently widespread consensus within the Council in case of a sharper economic slowdown in core countries. An rate cut would ease the cost of tapping the ECB window, especially for peripheral country banks, but would hardly provide any additional stimulus to the real economy.

– There were pressing questions on the Single Supervisory Mechanism SSM, given the outcome of this week’s ECOFIN meeting. Draghi’s position was rather neutral, and he stressed that while the ECB will be able to carry out its tasks in the best possible way, the decision on how many banks it should supervise is a political one. Draghi also underlined that the process of transforming the European institutions is a lengthy one and should be put into perspective.

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