ECB: Say It Again

The ECB left the key policy rates unchanged in October. During the press conference, Mario Draghi tried to remain as dovish as he was in September. The inflation outlook is subdued and the economic recovery is “weak, fragile and uneven”. The Governing Council has a bias towards more monetary policy accommodation, and “stands ready to act” if needed.

The ECB Governing Council met today in Paris, for once on Wednesday due to Germany’s unification holiday tomorrow. The Council left key policy rates unchanged. According to the “forward guidance” defined in July, the Council reiterated it has a bias towards more monetary policy accommodation, and “stands ready to act” if needed.

Status quo was widely expected this month. Main interrogations were left for the press conference and lay with what could prompt an action on interest rates or another special Long Term Refinancing Operation (LTRO) in the future.

Indeed recent data on activity, inflation and credit did not change the general assessment delivered last month. Activity surveys from the European Commission or PMIs continue to record gradual improvement, but hard data and one-off effects recorded in Q2 point to “somewhat weaker GDP growth” in the third quarter of 2013. All in all, the recovery is still “weak, fragile and uneven”, which fully justifies that monetary policy continues to be accommodative.

Although he was addressed many questions on that front, M. Draghi refused to see the decrease in inflation, that has fallen to 1.1% in September (after 1.3% in August), may be a concern for price stability. Indeed, we are there at the “very low side” of the Bank’s definition for price stability (close but below 2%), but it has to be considered over the medium, and, all in all, inflation developments are in line with the ECB’s expectations.

All in all, the discussion over a rate cut continued within the Council, and was described by President Draghi roughly with the same words as last month’s: some Council governors judge that there was no more place for a debate on a rate cut, while others were still advocating such a cut.

Tensions on money markets have receded somewhat over the last weeks. However, M. Draghi took all available occasions offered by the Q&A session to repeat that the Bank was monitoring closely these developments and was ready to consider all available instruments, including a LTRO, if needed. The Council is firmly decided to provide liquidity as needed to support the recovery, provided that this liquidity is not a replacement for a lack of capital.

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