FRANKFURT (MNI) – European Central Bank chief economist Peter Praet
Tuesday dampened rate cut expectations, saying that “there is little
margin of maneuver” on interest rates and the ECB should focus instead
on “ensuring the effectiveness of monetary policy.”
Upcoming Eurozone PMIs this Friday will now move into focus as a
key signal of how close the central bank may be to lowering official
borrowing costs.
The ECB left rates unchanged at a record low of 0.75% on Thursday,
but dismal new ECB staff forecasts for growth and media reports that a
small number of Council members had scuttled a rate cut spurred
speculation that the central bank could reduce rates as soon as next
month.
But asked by the Wall Street Journal about the prospects of a move
in January – which would be a first in the ECB’s history – Praet
downplayed the possibility.
The ECB is monitoring signals from the real economy, as well as
money and credit developments, but interest rates “are not the main
issue” for the ECB right now, Praet stressed. Rather, it will continue
to concentrate on addressing the significant divergence in financial
conditions across the Eurozone, he said.
Praet urged patience, saying time was needed for the ECB’s various
measures to have their full effect in financial markets and the Eurozone
economy. “We don’t see a need to come up now with new measures,” he
said.
Praet’s comments are in line with those of ECB President Mario
Draghi, who stressed in his press conference Thursday that the ECB’s
monetary policy stance is “accommodative” and that additional easing as
a result of lower sovereign bond spreads following the ECB’s
announcement of its OMT bond buy program has yet to work its way through
the economy.
However, reports that the majority of Governing Council members
were open to a rate cut last week raise doubts about the degree of
confidence on the Governing Council that this will be enough.
A Eurosystem source told MNI last Friday that objections by Draghi,
Executive Board members Joerg Asmussen and Benoit Coeure and Bundesbank
President Jens Weidmann blocked a rate cut that had been favored by a
significant majority of the ECB’s Governing Council.
According to a report by news agency Bloomberg, the ECB decided not
to move rates because of the negative signal a cut might send if
announced in conjunction with the significant downward revisions to the
ECB’s growth and inflation forecasts.
The key question in trying to project policy moves going forward is
whether such signalling considerations were indeed the main reason for
Draghi, Weidmann, Asmussen and Coeure to oppose a cut. Should that be
the case, a rate cut in the near term could be the likely scenario.
However, if this powerful minority bases its objection on the more
probable argument that clearing the monetary transmission mechanism
should be the ECB’s key focus, and if it still harbors hope that the
positive effect of the OMT announcement will feed into the real economy,
then the prospects for a cut are far less certain.
Should an improvement of financial and economic conditions in the
periphery prove elusive, the ECB might first opt for the more targeted
approach of easing credit costs for small and medium sized companies,
which Draghi has described as unjustifiably high. To this end, the ECB
could go further down the road of broadening the pool of eligible
collateral.
Still, a rate cut remains distinctly possible given the weak
economic environment – as reflected again in Wednesday’s much worse than
expected 1.4% m/m drop in Eurozone industrial production – and the broad
support on the Governing Council for more easing measures.
Upcoming Eurozone PMIs, due out on Friday, will now take on
considerable importance. Should they confirm a bottoming out of the
region’s economy, it could push a rate cut off the table – at least for
January. Any significant downside surprises, however, might move the
issue back on the agenda.
Praet also shed some light on the ECB’s thinking about pushing the
deposit rate below zero should it opt to cut its main refinancing rate.
“The experience shows you have to be careful when you go into
negative rates, especially the effect on bank lending conditions,” Praet
was quoted as saying. He suggested that if the ECB decided to cut its
refi rate to address the weak Eurozone economy, it might simply allow
the refi rate to move closer to the deposit rate.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@mni-news.com
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