Hello and welcome to the FT’s live blog on the European Central Bank’s rate decision and press conference. All eyes on Thursday are on the ECB and what it has left in its tool kit as gloomy data throws further doubt on the recession-bound eurozone economy.
Many economists are expecting what would largely be a symbolic cut in interest rates. The governing council’s vote is due at 12.45 (BST) and ECB President Mario Draghi will meet the press at half past one.
By Claire Jones and Lindsay Whipp. All times are UK time.
Hello and welcome to today’s live blog. European stocks have dipped this morning ahead of the decision, which is due in just over 30 minutes.
Will ECB president “Super” Mario Draghi struggle to make it to the next level? The FT’s Frankfurt bureau chief Michael Steen writes that the options open to Mr Draghi on Thursday.
There are, however, four things he and the rest of the governing council can do:
cut the central bank’s main refinancing rate by a quarter point;
deploy forward guidance by pledging to keep rates ultra low for an extended period into the future;
accept poorer collateral from banks in exchange for central bank cash; and
buy up bundles of SME loans to help struggling businesses in recession- hit eurozone economies.
The first is by far the most likely option, the last the most radical.
A raft of disappointing economic data in recent weeks has heightened speculation that the ECB will cut rates.
Among the gloomy data has been the purchasing managers’ indices, compiled by data firm Markit. Markit’s chief economist Chris Williamson has this interesting chart showing how the PMIs have influenced the governing council’s thinking in the past.
One of the main problems facing the ECB is the disparity in lending conditions across the eurozone.
As the FT’s capital markets editor Ralph Atkins and Barclays’ Julian Callow explain in the video below, businesses in Germany are finding it far, far easier to borrow than their Greek counterparts, only a quarter of which have had their loan applications accepted.
Among the policy options that would address this are a relaxation of collateral requirements to include more SME loans or, more radically, purchases of bundles of SME loans by the ECB itself.
Here’s Kit Juckes of SocGen’s take on what Draghi has to do
The bottom line on the ECB today is that the real world is a different place from the fantasy world of markets. And the ECB has done a far, far better job of curing the market world than the real one. That is to say, we have a steady currency, tight spreads, low yields, and equity markets that are up on the year. Now, Mario, you need to tackle the real world’s woes of recession, impending deflation, and catastrophic unemployment. And that is far, far harder…
The FT’s currency correspondent writes on what’s happened to the euro ahead of the decision:
Alice Ross: The euro fell against other major currencies ahead of the European Central Bank’s monthly meeting, with policymakers widely expected to cut interest rates to help stimulate the struggling eurozone economy.
The single currency dipped 0.1 per cent against the US dollar to $1.3147 ahead of the decision due at 12.45pm BST, with expectations the ECB would cut headline rates by 25 basis points to 0.5 per cent.
The euro fell 0.2 per cent against the pound to £0.8455 and was 0.3 per cent lower against the Japanese yen at Y127.77.
Analysts were also expecting the ECB to take other “non-standard” measures to help stimulate the eurozone economy, such as plans to encourage more lending to small and medium-sized businesses and a possible extension of the central bank’s emergency funding line for eurozone banks, known as its longer term refinancing operations.
The ECB has cut its main refinancing rate by a quarter point to 0.5 per cent, as expected.
The rate on the marginal lending facility has fallen by 50 basis points to 1 per cent. The deposit facility rate remains at zero.
No shock and awe from the ECB yet, just a quarter-point cut in the main refinancing rate in line with expectations. But Mr Draghi could announce more measures in his presser, which begins in a little over half an hour.
The half-point cut to the marginal lending facility will help only if eurozone banks need emergency overnight funding, or if they need emergency liquidity assistance. More on which here:
The cut also keeps the rate corridor symmetrical, with 50 basis points separating both the lending and deposit rates from the main refinancing rates.
Just minutes after the rate cut, analysts are already expecting more easing. This from BNP Paribas’ eurozone economist Ken Wattret:
Ken Wattret: We expect the door to be left open to another refi rate cut given the likelihood of continued weakness in the economic data, with “wait and see” much more likely than “this is it” in our view.
The FT’s currencies correspondent Alice Ross writes on what’s happened to the euro since the decision:
Alice Ross: The euro hit $1.32 against the US dollar, erasing all its earlier losses, after the ECB cut headline interest rates as expected to 0.5 per cent but also unexpectedly cut the interest rate on its marginal lending facility from 1.75 per cent to 1 per cent. The single currency hit a daily low of $1.3124 as the announcement was made in volatile trading but quickly rose, gaining 0.2 per cent to a daily high of $1.3210 minutes after the ECB announcement. The single currency also erased earlier losses against the Japanese yen to rise 0.1 per cent to Y128.58.
Ahead of the presser, here’s a few tips from Citi’s Valentin Marinov on a couple of things to look out for from Mr Draghi:
1/ Further aggressive easing. Signs in the ECB statement that medium-term inflation risks are now seen pointing to the downside even after the rate action (compared with balanced risks in the April statement) would be a strong signal that more easing (conventional or unconventional) is coming before long. I think that the risks for the change in language have increased given the very weak April CPI print. Aggressive easing measures should make the euro a more attractive funding currency and could add to the headwinds for the single currency.
2/ detailed SME lending program. Mr Draghi could unveil plan where the ECB agrees to accept asset backed securities with underlying SME loans as collateral and apply reduced valuation haircuts (currently at 26%) could be seen as a concrete measure to stimulate lending in the Eurozone. Some uncertainty will likely linger especially related to the banks’ ability to transform the non-marketable credit claims to SMEs into marketable ABS and effectively create a market for these securities. In this regard, Citi economists doubt that the Governing Council will take the extra step of committing to buy the ABS based on SME loans directly.
As an alternative, the ECB could indicate it is looking into plans to start accepting (SME) credit claims directly as collateral. Such a plan could be plagued by even greater uncertainty given the heterogeneity of non-marketable bank claims to SMEs in the Eurozone and the need to harmonize the valuation of these assets. Last but not least, the ECB could announce a special Funding for Lending Scheme (FLS) for SME similar to that implemented by the BoE and the UK Treasury. The uncertainty in this case would be related to the ultimate impact of the policy given the somewhat disappointing experience of the UK officials.
This is what Nancy Curtin, chief investment officer of Close Brothers Asset Management, makes of the decision:
The ECB’s move to cut rates is a positive step away from austerity, and a step towards growth in Europe. We may not have seen it reflected in overt policy until this point, but it’s clear that European policymakers are taking on board the fiscal impact of austerity as unemployment across the Eurozone hits a record high, becoming more flexible to try and prevent a downward spiral across the Eurozone. While trimming rates should bolster public confidence, by itself it may not be enough to stimulate increased economic activity. One of the key hurdles to growth in the Eurozone is the restricted supply of credit to SMEs. We would welcome an ECB equivalent of the Funding for Lending Scheme, which could be a shot in the arm for many weakening European economies. Given weakening economic data, we need to see more bold moves towards a pro-growth policy from individual governments – as well as the ECB – before investors will begin to get excited about EU equities once more.”
The presser is about to begin. For anyone who wants to watch it live, here’s a link:
The stock markets are steady following the ECB’s move. From our markets coverage:
The FTSE Eurofirst 300 is up just 0.1 per cent as the majority of European bourses come back on line after the May Day break.
ECB president Mario Draghi begins speaking.
Here are some highlights from the opening remarks.
Mr Draghi says the rate cut should support the economy, spurring a recovery later this year. Inflation expectations remain well anchored. Risks to inflation are “broadly balanced”, so there’s no sign that another rate cut is imminent. Rates will remain low for “as long as needed”. Recovery should begin in the second half of this year, though risks are to the downside for growth.
The ECB’s special liquidity operations will remain in place until at least the middle of 2014.
ECB officials have begun discussions with the currency bloc’s lawmakers about the collateralisation of SME loans. Not much besides that on helping the eurozone’s struggling businesses. He notes that the fragmentation of the euro area banking system is less pronounced than it was last year, but that interest rates in the periphery do need to fall further.
The questions begin. First one: will there be another cut? Mr Draghi notes the decline in inflation and weak growth, but largely swerves it. Says the central bank stands ready to “act as needed”.
Mr Draghi emphasises the importance of keeping the special liquidity facilities open until the middle of 2014. “There can’t be fears of a lack of funding as an excuse for not lending,” he says.
Lots of tweeters are keen for journos to ask about Cyprus. A sample question courtesy of ReDefine’s Sony Kapoor:
The decision to cut was not unanimous. “There was a very, very strong prevailing consensus towards an interest rate cut of 25 basis points,” the ECB president says.
Mr Draghi says the ECB is “technically ready” for a cut in the deposit rate below zero, but warns of the “unintended consequences” of such a move. He has made both points before so negative rates don’t look particularly likely in the months ahead.
The ECB is, he reiterates, “ready to act as needed”.
The FT’s Michael Steen’s turn. He couldn’t squeeze in a third question, but here’s Draghi’s response to his first two on whether today’s decisions were too little too late and where he stands on the austerity versus growth debate:
Draghi argues that monetary policy has been “extraordinarily accommodative” throughout and repeats that taking these actions now are more effective than if the central bank had made similar moves a few months ago.
On the austerity debate, he argues that it is important not to unravel the fiscal consolidation that governments have already undertaken, but emphasises the use of spending cuts over tax increases in a region where taxes are already high. He says the key to fiscal consolidation is credibility and having a credible framework within which to implement it.
It appears market participants have interpreted Mr Draghi’s comments on negative rates as a signal that the deposit rate could soon be cut. This from the FT’s markets editor Chris Adams:
Chris Adams: Euro tumbling on Draghi’s comments on negative deposit rate: euro falls below $1.31
Some reaction to the ECB president’s comments on cutting the deposit rate from Monument Securities’ Marc Ostwald:
Marc Ostwald: Would negative interest rates help lending? NO – The availability & supply of credit is (perhaps unfortunately) not a driver of credit demand in a depression, if politicians cannot create an environment that is broadly stable, or at least relatively predictable in terms of legal and fiscal parameters so businesses can plan forward on a medium to long-term investment perspective, and if regulators cannot agree on bank capital requirements, then everything the ECB tries to do will fall on fallow ground! The ECB can call on govts to act , but the govts across the Eurozone are not even reading the same book, so getting on the same page is not a possibility!
Would negative rates be “bailing in” depositors in a rather more insidious way than Cyprus? YES absolutely.
A follow-up question on the austerity debate:
Draghi explains that what is important is that governments don’t unravel progress achieved and that if a country needs time, a trade off shouldn’t be a compromise on the ultimate objective but ensuring the framework to achieve it is credible. He stresses that this issue is not one that is up to the ECB
“Encouraging signs” of a less fragmented eurozone banking system influenced the decision to cut, Mr Draghi says.
Alice Ross writes on the euro’s fall to an intraday low on ECB deposit rate remarks
Alice Ross: The euro hit its lowest level all day against the dollar after Mario Draghi, European Central Bank president, said that the committee had an “open mind” over whether to introduce negative interest rates on eurozone deposits.
The ECB made no change to the deposit rate in its monthly statement, currently 0 per cent. The single currency dipped below $1.31 on the comments to hit $1.3075, a fall of more than 0.7 per cent against the dollar on the day.
When questioned by reporters on the fall in the euro following his remarks in a press conference on the deposit rate, Mr Draghi said the ECB’s mandate was to achieve market stability over the medium term, citing the weakness in the eurozone economy that had spilled over into the first quarter of this year.
CNBC has the final go at the microphone – brings up that the Pope is tweeting about his unhappiness with unemployment and asks whether Draghi is also frustrated.
“We are … frustrated, yes certainly. We view improvements in the financial markets. We think financial markets are the only and the necessary channel through which monetary policy is transmitted.”
James Wilson, one of our Frankfurt correspondents, has sent over some reaction from Germany. He says that banks were quick to weigh in with fears that the rate cut will lead to a bubble in Germany – where Angela Merkel last week said rates should really be higher.
“This raises the risk of an increase in investments that are not economical over the long term in the better-performing eurozone states,” said the association representing German’s co-operative banks. The lobby group for the country’s Landesbanken said savers were being hit again and said any reduction of deposits because of the unattractive interest rate could harm banking stability.
Here are three key takeaways from the presser.
The euro plunged to an intraday low on the back of comments on that the ECB had an open mind to cutting the 0 per cent deposit rate. The markets have taken that as a *signal that negative rates could soon become a reality, or at least are more likely than previously thought*.
The decision to cut by a quarter point was “not unanimous”. Mr Draghi hinted that some members of the governing council had “supported a bigger rate cut”.
There was little from the ECB president on measures to help SMEs in the periphery. However, Mr Draghi repeatedly stressed that, with the ECB willing to offer cheap loans until “at least the middle of 2014″, there was no excuse for banks not to lend to businesses.
That’s all from us. Thanks for joining.