The Governing Council meeting in Paris today left the main refinancing rate at 0.5 percent for a fifth month after cutting it by a quarter point in May. The decision was predicted by all 52 economists in a Bloomberg survey. Officials held the deposit rate at zero and the marginal lending rate at 1 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m.
Draghi put investors on notice last month that the central bank is ready to act again if needed to boost liquidity in the banking system, with another round of long-term refinancing operations as one option. Economists from Credit Agricole CIB to Berenberg Bank say that while the ECB may inject more cash at the end of the year or in early 2014, it will hold off for now.
“We’ll hear a dovish tone today once again, we’ll hear a repetition of forward guidance and we’ll see the door for further liquidity measures wide open,” said Frederik Ducrozet at Credit Agricole in Paris. “But there won’t be any new announcement. The time for delivery hasn’t come yet.”
The central bank is trying to shore up the euro region’s recovery by keeping its official interest rates low. At the same time, it says it wants to contain volatility in market rates as investors face risks including a squeeze on excess liquidity.
The overnight rate that banks expect to charge each other by the ECB’s September 2014 rate meeting, as measured by Eonia forward contracts, was at 0.21 percent today. While that’s down from 0.3 percent on Sept. 5, the date of the ECB’s last rate decision, it compares with less than 0.1 percent in May.
Expectations of borrowing costs rose globally after the U.S. Federal Reserve signaled in June that it’ll start tapering its $85 billion a month bond-buying program later this year. The drop in the 1-year Eonia forward rate since the ECB’s last meeting has been helped by the Fed’s unexpected decision on Sept. 18 to refrain from reducing its purchases for now.
The ECB issued more than 1 trillion euros ($1.4 trillion) in three-year loans in late 2011 and early 2012, giving banks an option to repay them early, as Europe faced a credit crunch. As banks take up that option, excess liquidity in the euro area’s financial system is approaching a 200 billion-euro level that Draghi has previously signaled as a lower limit.
The measure fell to 208 billion euros on Sept. 27, the lowest since December 2011, compared with a high of 813 billion in March 2012. It was at 221 billion euros yesterday.
Draghi will say “that more long-term loans are still on the table and he may even hint at another LTRO being deployed by the end of the year,” said Christian Schulz, senior economist at Berenberg in London. “But I don’t expect any policy action today.”
The first of the two LTROs expires by the end of next year. Instead of a new round for now, Draghi may extend a policy of granting banks as much cash as they need until at least July 2014 in regular refinancing operations, according to Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. That’s a pledge Draghi made in May.
“It is highly likely that this extension in the guidance on liquidity will be announced within a matter of months, and just about more likely than not this month,” Barwell said. “The extension of the fixed-rate, full-allotment regime out beyond the expiry of the current LTROs, creating a fuzzy end point for the ample liquidity regime, is a more plausible preliminary and potentially final step.”
The ECB’s challenge will be to communicate its intention to keep rates low, which is a stance consistent with a weak or shrinking economy, as evidence mounts that the region is returning to growth. Since the September rate meeting, economic confidence in the euro area as measured by the European Commission rose for a fifth month and a gauge of factory output gained for a third month.
Draghi, speaking to the European Parliament in Brussels on Sept. 23, said that while economic-survey data has signaled the region’s economy will continue to improve, unemployment at 12 percent “remains far too high, and the recovery will need to be firmly established.”
The view of a gradual recovery with subdued credit dynamics and inflation stands behind the ECB’s pledge since July to keep official interest rates at their present level or lower for “an extended period,” Draghi reiterated in Brussels. Lending to the private sector fell the most on record in August.
“Despite the ongoing recovery in economic activity, the ECB believes that risks remain skewed to the downside, and we agree with this view,” said Philippe Gudin, chief European economist at Barclays Capital in Paris, who says the central bank may offer more long-term loans before the end of the year. “Although we do not expect such an operation to be announced today, Mario Draghi is very likely to mention once again that the ECB is ready to act.”
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