ECB Decision Day Guide From Negative Rates to Liquidity MeasuresAlessandro Speciale
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 Brussels at 2:30 p.m.
-- Benchmark rate: Only 2 of 58 economists in a Bloomberg News survey predict a cut in the main refinancing rate from the current record-low 0.25 percent. G&P Institutional Management says the ECB will lower the rate to 0.15 percent, and Raiffeisen Zentralbank predicts a reduction to 0.1 percent.
-- Deposit rate: In a separate Bloomberg survey of 53 economists, only G&P and ICPBI forecast the ECB will cut the deposit rate from zero and take the euro area into the little-explored land of negative rates. Policy makers will maintain the spread between official rates to support the “desired revival of market activity,” according to Huw Pill, chief European economist at Goldman Sachs Group Inc.
-- Inflation: Consumer prices in the 18-nation currency bloc rose 0.7 percent in April from a year earlier. While that’s an acceleration from March, when inflation was the weakest in more than four years, the rate remains at less than half of the ECB’s goal of just under 2 percent. The central bank might look at the rise in core inflation, which strips out volatile items such as energy and food, as a sign that prices will pick up.
-- Exchange rate: The euro has climbed about 9 percent against the dollar since July, adding downward pressure to import prices and curbing the competitiveness of euro-area companies. While the exchange rate isn’t an ECB policy target, Draghi has said that it is becoming “increasingly important” for the central bank. Governing Council member Jens Weidmann said in March that a negative deposit rate would be an “appropriate measure” for limiting the euro’s gains.
-- Money markets: Average overnight interbank rates in April exceeded the ECB’s key rate for the first time since 2008 and 3-month volatility is the highest since at least 2004, testing Draghi on his comments that any “unwarranted tightening” could trigger action. The pressure may have eased after banks used ECB operations to bolster excess liquidity and push the benchmark overnight rate, or Eonia, lower.
-- 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 168 billion euros ($234 billion) of cash to the financial system. The drain has failed for the past four weeks, signaling banks want to hold onto the liquidity.
-- 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. “We will want to make sure that this is being used for the economy,” Draghi said in December.
-- Fixed-rate full allotment: The ECB could extend its policy of granting as much cash as banks need against eligible collateral. The measure was introduced in October 2008 after the collapse of Lehman Brothers Holdings Inc. sparked a global credit crunch and is scheduled to run until at least July 2015.
-- Reserve requirements: The ECB could lower or remove the reserve ratio, currently at 1 percent, to free up liquidity.
-- Quantitative easing: Speaking in Amsterdam on April 24, Draghi said large-scale asset purchases would be justified if the medium-term outlook for inflation worsens. An indication may come in June, when the central bank revises its macroeconomic forecasts through 2016. ECB Executive Board member Benoit Coeure said on April 13 that any purchase program would target a mix of assets to reduce “term premia across markets and jurisdictions.”
-- Asset-backed securities: The ECB and Bank of England have called on regulators to ease rules on asset-backed securities in Europe. That would provide a broader range of funding options for companies and create assets the ECB could buy to supply liquidity. Executive Board member Yves Mersch said on May 5 that he is “very confident” the ECB will have an initiative to support the securitization market “in the very near future.”
-- Minutes: The ECB has started drafting trial minutes of its Governing Council meetings, two euro-region central-bank officials said in March.
-- 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.
-- 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.