The ECB’s hopes are colliding with reality

The eurozone’s monetary custodians did not resolve to adopt any new monetary-policy measures at today’s Governing Council meeting. In principle, new decisions were not to be expected because the ECB has recently extended its forward guidance and announced the launch of fresh liquidity measures. Regarding TLTRO-III, ECB President Draghi has promised that details about the precise terms of the new series will be communicated at one of the forthcoming meetings of the Governing Council. It was emphasised that the pricing of the new TLTRO-III operations will take its bearings by further developments in the economic outlook as well as by bank lending. It would appear that the ECB’s top echelons will decide definitively about the details of TLTRO-III at the June Governing Council meeting. This is when the next regular quarterly GDP projections are scheduled to be published. What is noteworthy is that Dr. Draghi accentuated in today’s Introductory Statement that the ECB is looking into the implications of the low-interest-rate environment for the banking sector. This is fuelling speculation that the euro area’s monetary authorities may introduce a tiered deposit rate / exemption threshold. The ECB president was at pains to stress that he and his team have not yet arrived at any decision on that score, but market actors have already drawn their own conclusions. 1y/1y EONIA forward rates have gathered further downside momentum. In the market’s view, a multi-tier deposit rate will, in principle, open up scope for the ECB to push the deposit facility rate even further into negative territory.

Dr. Draghi conceded that incoming economic data have recently proved to be weaker than expected. At the same time, however, he emphasised the underlying strength of the European economy, supported by further employment gains and rising wages. In his opinion, “overall probabilities of a recession (…) remain on the low side”; admittedly, the formulation at the previous meeting was even more confident on this count: “we assess the probabilities of a recession as being very low.” The clear downward shift in (5y/5y) inflation expectations is not causing the ECB undue worries: in Draghi’s assessment, this merely reflects currently cloudier economic prospects.

On balance, Dr. Draghi did not give an impression of effortless ease at today’s press conference. On the one hand, the head of the central bank endeavoured to convey an air of subdued optimism with respect to the outlook for economic growth and inflation; on the other hand, though, it was easy to gain the impression that the next round of monetary easing is quietly being prepared behind the scenes because policymakers are apprehensive that the downside risks looming will actually materialise. The debate about unclear new measures which are the subject of controversy within the Governing Council is continuing to spawn uncertainty.

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