The European Central Bank did more than I thought they would last night. In cutting interest rates and embarking on a plan to purchase asset backed securities from banks, the Governing Council has now done everything it can short of large scale purchases of sovereign bonds. But will it be enough?
The ECB cut its key interest rates 10bps,
taking the refinancing rate to 0.05% and the deposit rate to -0.2%. In the Press conference Draghi said this move
was to give bidders in next week’s TLTRO (September 18) confidence that
interest rates would fall no further, thereby reducing the risk of a low
take-up. Apart from that, interest rate
reductions are now largely symbolic and will do nothing to improve what fundamentally
ails the Euro zone economy.
The ECB also announced two private sector
asset purchase programs – the first aimed at asset-backed securities and the
second covered bonds. There was scant
detail on likely size or duration of the program. What we do know is purchases will be limited
by the relatively modest size of the Eurosystem’s balance sheet of around €2.1
trillion (10% of Euro zone GDP).
Will this be enough? That depends on what you mean by
“enough”. It’s enough if the ECB was
looking to send a strong message about the intention to meet their inflation
objective. But in our view it’s not enough
to alter the outlook of weak growth (our Euro zone GDP forecasts 0.8% this
year, 1.2% next year) and a persistent undershoot of the central bank’s
In Draghi’s own words from his recent speech
at Jackson Hole “No amount of fiscal or monetary accommodation, however, can
compensate for the necessary structural reforms in the Euro area”. One of the key measures of success of this action
will be the extent to which respective member state Government’s take the
opportunity of the ECB buying them a bit
more time to get on with the job of structural reform.
After today there is only one step left for
the ECB: large scale purchases of public sector assets. They will clearly want to give today’s
announcements (and indeed those announced in June) time to work. The December meeting will be critical as that
is when the Governing Council will receive the next set of Staff projections for
economic growth and inflation.