ECB Will Still=’Extremely Cautious Behemoth’ In January

At this point, the ECB seems unlikely to produce any material changes in policy with its announcements on Thursday.


T&C reminders:

  • please see disclaimer at head of this blog.
  • please note the peculiarities of my discursive style: I try to make it empirical, but this isn’t the place for an excess of references and data
  • If you require such references/data, please note they are widely and publicly available


Additional conventional easing seems improbable.
In December the decision to cut by 25bp was taken by consensus.
Also, note one governing council member let it be known they were opposed to consecutive rate moves.
On the other hand the ECB is very likely to keep its easing bias – signalled by some of the words it used in its statement following December’s meeting: “substantial downside risks” to growth.
As for the ECB’s ‘unconventional options’, it still looks premature to try to assess the effectiveness of the latest round of the ECB’s non-standard measures.
Note most of the liquidity taken on by banks at Autumn’s 3-year LTRO has since been parked overnight at the ECB, with deposits regularly continuing to hit new historical highs.
Banks are hoarding cash, unsurprisingly.
On the SMP side, the ECB as The Man From del Monte is still saying ‘no’, quite emphatically.
But many continue to wonder if at some point the ECB might fudge some form of wider accommodation than we’ve seen so far via the SMP.
My view: it seems reasonable that the European authorities would try to get a closer look at how distressed sovereign debt fares in response to the entire zone moving toward a tighter fiscal compact.
For instance we can see that Italian and Spanish curves have benefited from the enormous 3-year cash injections at the quarterly LTROs, but the long end is still a battle field.
This reflects the fact that the weakest euro-zone states are still facing tougher financial conditions than the rest of the euro zone, even after suffering harsher fiscal adjustment.
However if by February’s scheduled 3Y LTRO there does not appear to be any appreciable cool-down in yields, this surely increases the chances that the ECB will crack in some way.
[Even if it does not guarantee that the central bank in fact will.]
Last but not least the so-called Real Economy.
Since the December meeting, it’s probably fair to say leading indicators have signalled some economic stabilisation.
Additionally, composite PMI and Ifo expectations have now been stronger for two-consecutive months.
Anecdotally economists appear mostly of the view that data for 4Q11 point to a minor euro-zone GDP contraction.
Also we can note the ECB expects CPI to move towards 2%, judging by its latest set of forecasts.
Finally of course, it’s always worth reminding ourselves that euro weakness is probably the most effective stimulus to the euro-zone economy at the present time.

It may be an unintended side effect, but it does buy some time.


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