By William Watts, MarketWatch
European Central Bank President Mario Draghi pushed back Thursday on market-based perceptions that policy makers were ruling out the prospect of interest-rate cuts if conditions in the eurozone deteriorated — but still appeared to leave investors looking for an easing of monetary policy disappointed.
Asked in a news conference if it was correct to assume that a rate increase was more likely than a cut, Draghi responded with a “no.” He noted that the possibility of future rate cuts were discussed by “several members” in the two-day policy meeting that concluded Thursday in the Lithuanian capital of Vilnius, and that policy makers had also talked about other measures, including relaunching quantitative easing, if the outlook were to significantly erode.
The issue appeared in need of clarification as the euro rallied after the ECB earlier Thursday said it expected interest rates to “remain at present levels” at least through the first half of 2020. That was a shift from the ECB’s earlier guidance that rates would remain on hold through the end of this year.
While such an extension of what’s known in central bank lingo as “forward guidance” would typically be viewed as dovish, analysts said the use of the term “present levels” was viewed by traders as a sign that growing expectations for a rate cut were misplaced.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said Draghi effectively “flip-flopped,” with the statement’s language “de facto” ruling out the possibility of a December cut that investors had priced in.
Draghi implied that the ECB won’t cut just because markets are pricing in the small but dangerous risk that escalating trade tensions and other threats could shut down global capital mobility, Vistesen said, while also noting that several members discussed the possibility of a rate cut and other measures without offering details on what would prompt such moves.
“In other words, the ECB discussed easing, but it is not willing to guide even to possibility of a Q4 cut. This makes little sense, but we have no doubt that the central bank will adjust accordingly in H2 if need be,” Vistesen said.
The euro (XTUP:EURUSD) rose following the announcement then trimmed initial gains. It remained up 0.3% versus the dollar at $1.1252.
The ECB’s main lending rate stands at 0%, while the deposit rate on funds parked by banks overnight at the ECB is at minus 0.4%.
The ECB also set terms for its previously announced round of targeted long-term refinancing operations, or TLTROs. The ECB is prepared to pay banks that exceed lending benchmarks as much as 0.3% to borrow the long-term funds.
The TLTROs are generous, long-term loans designed to ensure credit continues flowing to the eurozone real economy, particularly companies. This is the third iteration of the program rolled out by the ECB. In Thursday’s statement, the ECB said it would set the rate on the TLTROs 10 basis points above the average rate on main refinancing operations that prevails over the life of the loan. For banks whose eligible net lending exceeds a benchmark set by the ECB, the rate will be lower and could run as low as 10 basis points above the deposit rate.
With the deposit rate at minus 0.4%, qualified banks could be paid as much as 0.3% to borrow. A previous round of TLTROs allowed qualified banks to be paid as much as 0.4%.
The terms “were slightly less dovish than those of the previous round...In contrast, we think the consensus was for the terms to be at least as generous,” said Andrew Kenningham, chief Europe economist at Capital Economics, in a note.
The Stoxx 600 Europe Banks Index (STOXX:XX:SX7P) fell 0.7%, reversing gains scored after the announcement. The pan-European Stoxx 600 Europe Index (STOXX:XX:SXXP) trimmed earlier gains to rise 0.2%.