June 11, 2012
As expected, the ECB left its key policy rate at 1% but extended the current full allotment regime to the end of the year. Somewhat surprisingly, the ECB staff still forecasts GDP growth this year as being between -0.5% and +0.3%.
In his intro, President Draghi mentioned heightened uncertainty with regard to the economic outlook. In the Q&A he revealed that all the incoming data after the staff forecast’s cut-off date were weak. His reference to a gradual recovery in the medium term sounded pretty much like whistling in the dark. He repeated that monetary policy cannot fill other institutions’ lack of action and still hopes that clearer political signals might get the ECB off the hook. But he seems to fear that the ECB might be forced to act. But how? He said that in the current environment price signals (i.e. rate cuts) might have little effect, but also mentioned (decreasing) economies of scale with regard to further balance sheet expansion.
Still, the frank statement that a small number of council members favoured a rate cut might hint at the direction in which the ECB is leaning. This might also be easier to swallow for the Germanic front in the council, which is increasingly nervous about the size and the quality of the ECB’s and their NCBs’ balance sheets. Text
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