European Central Bank President Mario Draghi's press conference Wednesday offered little clarity for ECB watchers on the timing of another interest rate cut or long-term refinancing operation, although both remain likely options for the Governing Council.
Draghi was generally considered more dovish in his outlook on the economy by European analysts, but his failure to mention exchange rate risks in his opening statement was among the reasons for a spike in the euro-dollar rate to above USD 1.36. Some analysts emphasized that exchange rate appreciation could still tip the balance in favour of more easing in future.
While most analysts believe another LTRO is likely at some point in future, many felt Draghi signalled no immediate concern about the decline in excess liquidity.
The following is a collection of comments from ECB watchers following Draghi's monthly press conference:
HOWARD ARCHER, IHS Global Insight: "The ECB is keeping the door wide open to all policy measures including taking its key policy rate down from the current level of 0.50%. In particular, it looks ever more likely that the ECB will undertake another LTRO.
"We have little doubt that the ECB will undertake a new LTRO. The only question seems to be when exactly it will do this and what time span will it be for? We favour another three-year LTRO before the end of this year, perhaps just after the Fed starts to taper, which we currently suspect will happen in December. Meanwhile, we believe that it remains very possible that the ECB will eventually end up cutting interest rates from 0.50% to 0.25%."
CHRISTIAN REICHERTER, DZ Bank: "We are sticking to our expectation that guardians of our currency will become active again at a given time to provide support for the euro economy. Draghi did not repeat the possibility of another long-term tender for nothing. We also continue to see a further reduction in the main refinancing rate as a possibility."
RICHARD BARWELL, RBS: "President Draghi does not sound on high alert: As was the case last month, President Draghi's comments on the stock of excess reserves and repayment of LTROs did not sound like a central banker on the brink of action."
"President Draghi emphasised that current inflation was too low but he noted that these developments were not unexpected and pivoted attention to the medium term outlook. In short, there was no great sense of alarm on inflation that might signal an imminent move on rates."
PETER VANDEN HOUTE, ING Bank: "Surprisingly there was no mention of the euro exchange rate despite the fact that it is back around levels that prompted the ECB in February to qualify it as a downward inflation risk (no wonder the euro promptly climbed higher against the dollar today)."
"With the recovery at best shaky and inflation likely to hover a little longer at levels below the ECB's target, it is obvious that a tightening of monetary policy is still a long time away from now ... While the probability of a further rate cut has clearly diminished over the last few months, a new LTRO still looks a sure bet."
KEN WATTRETT, BNP Paribas: Draghi "was rather dovish in the context of the data flow that we're having, but as far as markets were concerned it was not dovish enough...My feeling is there's a circularity with this: The less dovish the market sees the ECB as being, the more likely the euro is to go higher, and ultimately that's likely to tip the balance in favour of the ECB doing something."
"My guess would be the ECB will end up taking action and LTRO seems a bit more prominent now than it was two or three months ago...a rate cut is still an option, particularly if the exchange rate appreciates. [The exchange rate] will probably enter the statement in early November as a downside risk to price stability."
ELGA BARTSCH, Morgan Stanley: "While the overall tone of the press conference was very similar to the September one, we would highlight an important change to the introductory statement. When talking about paying particular attention to money market developments and how they could potentially affect the ECB's policy stance, the ECB added that it stands ready to act using all available instruments. Clearly, one of these tools is the refi rate cut, we are forecasting ... an LTRO is another policy tool though that the ECB could use."
RAINER SARTORIS, HSBC Trinkaus: "It is clear that the ECB is not expecting a dynamic recovery...The bias of the ECB is still towards staying the same or even lowering interest rates. In my eyes little has changed here, and there were no indications whether it will happen sooner or later. We think that if something is going to happen, then the ECB will operate through the liquidity channel. We don't see a rate cut for the time being."
BEN MAY, Capital Economics: "As in September, Mr Draghi failed to repeat past warnings that interest rates could be reduced further. What's more, at the policy meeting, some Governing Council members once again indicated that they no longer considered a discussion of a further interest rate cut to be warranted. Given all this, we continue to think that the main refinancing and deposit rates have probably reached their floors."
"He again acknowledged that further LTROs were a possible tool to manage short-run market interest rates...However, there was little indication that the ECB is considering using such measures in the immediate future."
MICHAEL SCHUBERT, Commerzbank: "Ahead of today's ECB press conference, markets had eagerly awaited more concrete hints about a further LTRO, but in the end, such expectations were disappointed ... [Draghi] rather stressed that there were 'a vast array of instruments' at the ECB's disposal, without putting any particular emphasis on a new long-term tender operation."
"Draghi was eager to dampen fears that a further reduction of excess liquidity will lead to higher forward rates soon. The reduction of excess liquidity was no longer mentioned in the Introductory Statement of the press conference. Moreover, Draghi urged not to read too much into the relation between the excess liquidity and short-term money-market rates."
PHILIP SHAW, Investec: "This month's statement repeated the message that the ECB will remain 'particularly attentive' to developments which could have implications for the stance of policy, but added this time that it was 'ready to consider all available instruments'. This was a step closer than in September towards hinting that a new LTRO might be in the offing, and Mr Draghi reiterated this message several times in the press conference. Nonetheless currency markets had been of the view that the ECB was even further down the track on this and as a consequence, the euro moved temporarily above $1.36."
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