Last week anti-capitalist protesters outside the European Central Bank were dominating (at least the local) news in Frankfurt, this week it was the turn of the policymakers inside the building. The ECB is keeping its rates on hold at 0.5 per cent and Mario Draghi, president, has been quizzed on where the eurozone is headed.
The ECB staff’s quarterly economic forecasts have been tweaked, so this year’s contraction is greater than previously forecast at 0.6 per cent and next year’s growth forecast creeps up to 1.1 per cent (but then a year is a long, long time in economic forecasting.)
What else have we learnt?
- Outright Monetary Transactions, or OMT, the ECB’s unused bond-buying programme that soothed financial market fears of a eurozone break-up was really very, very good. Or so says Mr Draghi, who clearly ate his porridge this morning judging by his very confident tone. “OMT has probably been the most successful monetary policy measure in recent times.”
- There is a lot of discussion inside the bank about other measures it could take, but they all remain “on the shelf” for now. This is probably because the governing council neither agrees on the need for more action nor can agree on what the most appropriate action would be.
- As we reported earlier this week, the ECB is not planning anything radical to help small and medium businesses in stressed countries like Spain and Italy gain access to cheaper borrowing. It has a project with the European Investment Bank to help revive a market in Asset Backed Securities, so that SME loan bundles could be traded, but this is a “medium- to long-term proposition”.
- The bank sees no deflation, nor risk of deflation in any eurozone country. And lower inflation was not of itself a big problem. “With low inflation, you buy more stuff,” Mr Draghi explained.
- The ECB, which is taking over the supervision of the eurozone’s biggest banks next year, is clearly concerned about the lack of a common resolution mechanism to deal with failing banks. Mr Draghi said there needed to be “an explicit commitment” by governments, the European Stability Mechanism (the eurozone rescue fund) and the Eurogroup to provide a “backstop” [i.e. cash] in case the ECB found holes in bank balance sheets when it starts an asset quality review later in the year… Watch this space.
- Despite Mr Draghi’s reference to “unacceptably high unemployment”, make no mistake that the ECB is committed to austerity policies, or fiscal consolidation as it prefers to call it. Mr Draghi made clear that the bank took a dim view on backsliding on fiscal deficit targets, saying that giving countries more time to hit them “should remain reserved for exceptional circumstances”.
A few other thoughts. In a welcome step towards keeping things simple, the ECB has abandoned its old unwieldy ranges for its economic forecasts and gone for simple numbers. So instead of hearing that the projection for inflation was between X per cent and Y per cent, we just get the midpoint of the projection, which was in any case the number everyone used to talk about when discussing the bank’s projections.
There were also two jabs at the US Federal Reserve. When talking about the bank asset quality review, Mr Draghi referred to the US’s own exercise in 2009, when he noted the exact level of the backstop required was determined before the balance sheet review took place. “Miraculously the capital needs of these banks came out exactly according to the backstop that had been allotted. Now we don’t have these magic powers…”
He also noted that the ECB was shrinking its balance sheet without causing market volatility — easy to interpret as a dig at the Fed’s end to its quantitative easing programme.
It’s not quite clear why Mr Draghi was making these points. His triumphal tone over OMT could be explained by the need to make a strong public case about the benefits of the scheme ahead of court hearings at Germany’s Constitutional Court next week which will look into the legality of OMT under the German constitution. But that does not explain the Fed comments.