There was no meaningful change in policy at the ECB June 2013 meeting:
- Policy rates were kept unchanged.
- The Council is still working on measures to help SME funding and considering negative rates, but not really doing much yet.
- The banking union remains a priority, but the politics of it may delay it further.
- The remarks on fiscal policy sound particularly hawkish, which is probably why the Euro strenghtened on the comments.
ECB policy rates unchanged
At the June meeting, the ECB governing council decided to leave the policy interest rates for the Eurozone unchanged. The main refinancing rate stays at 0.5% (the lowest in the history of the Eurozone), with marginal lending at deposit facilities at 1% and 0% respectively. You can find the full introductory statement by Pdt Draghi here.
While some market commentators had been speculating about a possible further 25bps cut, we highlighted in our previous post on ECB policy that the ECB seems reluctant, at least for now, to move the deposit rate into negative territory. The main reason for this is political, given the geographical clustering of creditor banks in northern Europe and debtor banks in Southern Europe. At the May meeting, the ECB opted for an asymmetric cut, and while a further asymmetric cut remains a possibility, Mr Draghi probably wants to keep some powder dry in case he needs to “shock and awe”. At today’s press conference, Draghi maintained that the Council considers it a possibility, but also remarked the potential for side effects, without specyfing what exactly they are.
ECB keeps defending the austerity line
Aside from the rate decision, which was not really a surprise, we highlight the ECB’s continuous defense of the austerity line. Let us highlight a passage of PdT Draghi’s statement (bold ours):
With regard to fiscal consolidation and structural reforms, the Governing Council welcomes the progress made and encourages governments to continue with determined efforts. It is essential that euro area countries do not unravel their efforts to reduce government budget deficits. The new European governance framework for fiscal and economic policies should be applied in a steadfast manner. In this respect, the Governing Council considers it very important that decisions by the European Council to extend the time frame for the correction of excessive fiscal deficits should remain reserved for exceptional circumstances. At the same time, it is necessary to continue, where needed, to take legislative action or otherwise promptly implement structural reforms. Structural reforms should, in particular, target competitiveness and adjustment capacities in labour and product markets, thereby helping to generate employment opportunities in an environment of unacceptably high unemployment levels, especially among young workers, prevailing in several countries. Combined action on the fiscal and structural front should mutually reinforce fiscal sustainability and economic growth potential and thereby foster sustainable job creation.
During the Q&A session, Draghi was pressured on the issue by several journalists, with some mentioning the IMF’s mea culpa on Greece. Draghi kept the line, maintaining that fiscal consolidation is “unavoidable” and (if implemented through spending cuts), can be growth positive. To us, it is interesting that the ECB is maintaining such a hardline when the rest of the world seems headed the other way. One possible explanation is that the defense of austerity is a mean to an end, namely to get Germany and the core countries to make concessions on the banking union and bank resolution front. On this point, Draghi was clear: it is necessary to get capital backstops for banks in place ahead of the banks asset quality review.
In short, there was no meaningful change in policy at the ECB June meeting. The Council is still working on measures to help SME funding and considering negative rates, but not really doing much yet. The banking union remains a priority, but the politics of it may delay it further. The remarks on fiscal policy sound particularly hawkish, which is probably why the Euro strenghtened on the comments.