By FXEmpire.com
Before we look at the ECB decision, lets get an understanding. The ECB has acted aggressively and above and beyond their call to action. Each time, the central bank has bought the EU leadership more time, by avoiding the immediate disasters and each time the EU has procrastinated or designed grand plans and schemes that take the co-ordination of many independent governments, such as their fiscal compact and each time they have avoided direct action. Mr. Draghi, among others, including direct statements from US President Obama have all called for the EU to take action NOW.
Although there was some expectation that the European Central Bank could cut its key policy rates today, the decision to leave them unchanged was in line with the consensus view. The only action the ECB took today was to announce that commercial banks could continue to get all the liquidity they demand at the ECB’s regular refinancing operation up to the end of 2012. This is a welcome but not surprising development.
Probably of greater importance, ECB President, Marco Draghi, told the regular monthly press conference that the ECB had debated cutting rates today but ‘in the end’ had decided against doing so or a number of reasons.
Significantly, Mr Draghi hinted that if upcoming data confirm recent signs of a renewed deterioration in economic conditions in the Euro area, the ECB ‘stands ready to act’. Mr Draghi set out a range of reasons why the ECB didn’t cut rates today. His comments suggest that the decision, arrived at by consensus, was the result of a fairly lengthy and detailed discussion and ‘a few members, I would say not many, would have preferred a rate cut today’. While the arguments Mr Draghi gave for not cutting rates are quite diverse, many of the reasons seem to be tactical in nature and, as such, markets are likely to anticipate a rate cut at the next policy meeting of the Governing council on July 7th unless economic data in the interim are altogether more robust than of late or the ECB is deeply unhappy with progress made by Governments in other policy areas.
One reason advanced by Mr Draghi for the decision not to change official rates today was that new ECB staff projections were virtually identical to those made in March (a time when the ECB seemed to be shifting towards a slightly more hawkish view of the world). In a narrow technical sense, the fact that the projections have not changed might tend to suggest that policy should also remain unchanged. However, Mr Draghi made it clear that the new projections shouldn’t be seen as a major obstacle to easier policy in the months ahead. First, he emphasized that since the cut-off date for the forecasts of May 24th the emerging evidence has pointed towards a notably weaker current trajectory for the Eurozone economy.
Furthermore, the Governing Council has recognized a rapidly changing situation by acknowledging ‘increased downside risks to the economic outlook’. Finally, today’s press statement also says ‘the economic growth remains weak’ – a notably more downbeat description of the current situation at present than it previously used.
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Originally posted here
