Bloomberg News

ECB Decision Day Guide From Low Inflation to Quantitative Easing

April 02, 2014

European Central Bank

The headquarters of the European Central Bank (ECB) stand in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

Here’s what to look for when the European Central Bank’s 24-member Governing Council releases its monthly interest-rate decision for the euro area at 1:45 p.m. and ECB President Mario Draghi holds a press conference in Frankfurt at 2:30 p.m.

-- Benchmark rate: Only 3 of 57 economists in a Bloomberg News survey predict a cut in the main refinancing rate from the current record-low 0.25 percent. Credit Agricole CIB and Danske Bank A/S say the ECB will lower the rate to 0.15 percent, and Goldman Sachs Group Inc. predicts a reduction to 0.1 percent.

-- Inflation: If the ECB opts not to ease monetary policy, Draghi should explain why subdued inflation isn’t yet a threat to price stability. Consumer prices in the euro area rose 0.5 percent in March from a year earlier, the weakest pace since 2009 and a quarter of the ECB’s goal of just under 2 percent. The numbers are distorted by the timing of the Easter holiday and Vice President Vitor Constancio said this week that he expects them to correct in April.

-- Exchange rate: The euro has climbed more than 7 percent against the dollar in the past 12 months, adding downward pressure to prices in the currency bloc. While the exchange rate isn’t an ECB policy target, Draghi has said that he’s looking at it “with attention.”

The ECB Seeks Options to Aid Economy

-- Deposit rate: Governing Council member Jens Weidmann said last month that reducing the overnight rate, currently at zero, for keeping funds at the ECB would be an “appropriate measure” for limiting the euro’s gains. Only Goldman Sachs and M. M. Warburg & Co. in a separate Bloomberg survey of 47 economists forecast that the ECB will take the euro area into the little-explored land of negative rates.

-- Quantitative easing: Weidmann also said that an asset-purchase program to inject liquidity into the financial system is in principle permissible. Analysts from UBS AG to Barclays Plc have said his comments shouldn’t be interpreted as a signal of imminent action. While the policy is used by the Federal Reserve, Bank of England and Bank of Japan, it is more controversial in the euro area as the ECB is banned from monetary financing of governments.

-- Slack: Draghi may elaborate on his comments first made in March that interest rates won’t rise even after growth improves because of the “stock of slack” in the euro-area economy. Central bankers from the Fed’s Janet Yellen to the BOE’s Mark Carney have cited the output gap, which has no standard calculation, as a reason to keep rates low.

-- LTROs: The ECB’s emergency 3-year loans to banks are losing their effectiveness as they approach maturity at the start of 2015, prompting speculation that a new round may be offered. Another LTRO might look different from the previous ones, when banks used most of the liquidity to buy government bonds. “If we are to do an operation similar to the LTRO, we will want to make sure that this is being used for the economy,” Draghi said in December.

-- Suspension of SMP drain: The ECB could halt the sterilization of crisis-era bond purchases. Ending the absorption, in place since 2010 to soak up liquidity from the now-defunct Securities Market Program, would add about 175 billion euros ($240 billion) of cash to the financial system. Weidmann said on Feb. 23 he wasn’t against a suspension.

-- Reserve requirements: The ECB could lower or remove the reserve ratio, currently at 1 percent, to free up liquidity.

-- Asset-backed securities: Draghi has said the ECB could support lending by raising the prominence of asset-backed securities in Europe, something that would require collaboration with regional authorities to change current regulations and legislation. Constancio said this week that the initiative is paused for now because “there are problems to be solved.”

-- Minutes: The ECB has started drafting trial minutes of its Governing Council meetings, according to two euro-region central-bank officials.

-- Asset Quality Review: Draghi may be quizzed on the second stage of the ECB’s Comprehensive Assessment of bank balance sheets. Euro-area lenders have complained that some of the information demands are excessive, and financial institutions found to be short of capital may have to inform the market before the results of the full assessment, which includes a stress test, are announced in October.

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Paul Gordon, Zoe Schneeweiss


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