ECB Follow-Up: A United Front

Published on November 7, 2013

The markets and vast majority of analysts did not expect a rate cut from the European Central Bank today. But despite the fact that the latest round of Eurozone inflation numbers showing a collapse of both headline and core inflation had come out just a mere week before today’s ECB monthly Governing Council meeting, allowing little time for additional analysis, we wrote on Tuesday:

Part of the discussion on the drop in inflation will be to point out that it is not entirely negative – lower energy inflation increases the purchasing power of consumers – but the drop in inflation has nevertheless now been deeper and broader than just energy related.

And while not our base case scenario, we would even assign some reasonable probability that the Council may decide to go ahead and cut the refi tomorrow (sic) anyway, rather than wait for the forecast round in December, given that the risks, merits and possibility of an interest rate cut have already been discussed – on and off – ad nause[a]m by the Governing Council, even if sporadically, now for months.

– SGH 11/5/13, “ECB: Back in Play”)-

Looking ahead, with the rate decision and black-out communication periods now over, six Executive Board and Governing Council members have been slated to speak publicly. The first, appropriately, will be President Mario Draghi himself, who as we wrote we understand to have been sympathetic to a narrowing of the refi corridor since at least July.

But intriguingly, the other five are all members that would generally be considered by markets to be either hawks, or moderate hawks – namely Executive Board Members Joerg Asmussen and Yves Mersch, and Governors Ewald Nowotny of the Austrian National Bank, Erkki Liikanen of the Bank of Finland, and Jens Weidman of the German Bundesbank.

We nevertheless expect all ECB members, “hawk or dove,” to present a strong united communication front in support of the decision to cut the refi rate, with the only question having been whether to wait another month for the updated quarterly forecast. Today’s move, as noted before, was after all in direct response to a now prolonged miss in the ECB’s fundamental inflation mandate, and we expect it to have been made with very little controversy if any at all.

And so even though some previous ECB council decisions, such as the rolling out of OMT purchases or even the more recent roll out of the Forward Guidance on rates in July, were subsequently followed by comments that may have lessened the impact of the decision by magnifying disagreements between ECB members, we absolutely do not expect that to be the case with today’s rate cut.

And unanimous support for the refi cut that has effectively now collapsed the EONIA market rate band from 0 to 50 basis points down to 0 to 25 basis points will certainly go a long way towards addressing all the criticism up to now, including even in today’s press conference, of a lack of commitment by the ECB to its forward guidance on low or lower rates. If there is any doubt, just look at the back end of the European rates strip.

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