FRANKFURT (MNI) – The European Central Bank is not in a rush to
launch further support measures to brighten the dismal economic outlook
reflected in the central bank’s new staff forecasts, judging from
Thursday’s comments by ECB President Mario Draghi.

Weak economic activity and a significant cut in ECB staff growth
projections evidently sparked a discussion today on the Governing
Council about an interest rate cut, a subject that had not been deemed
worth discussing at November’s monetary policy meeting.

At the same time, Draghi stressed that the outlook for price
stability – the ECB’s primary mandate – had not changed “substantially”
and that the bank’s monetary policy stance remains “accommodative.”

Staff forecasts now show GDP is expected to shrink for a second
year running in 2013, with the new mid-point revised to -0.3% from the
+0.5% projection in September. The first 2014 estimate shows the economy
recovering to 1.2%. Draghi said that risks to the outlook remained on
the downside.

Unsurprisingly, Draghi said the Governing Council had a “wide
discussion” on a possible rate cut. “But in the end the prevailing
consensus was to leave the rates unchanged,” he added, ascribing the
decision in part to limited change in the staff forecasts for inflation.

The new mid-point for 2013 stands at 1.6% (after 1.9%). Inflation
is expected to fall even further to 1.4% in 2014. Risks to the outlook
remain broadly balanced, Draghi’s introductory statement said.

Figures for both years notably undershoot the ECB’s price stability
target of just under 2.0%, raising some question marks about Draghi’s
statement that the price outlook had not changed significantly. It would
seem that the price outlook was not the principal factor staying the
Council’s hand on rates.

Draghi said repeatedly that the ECB’s monetary policy stance is
“accommodative” or even “very accommodative.” This easy policy “and
significantly improved financial market confidence” since the ECB’s
announcement of its new bond buying program should “work their way
through to the economy,” he said.

“To think that from July to today spreads of some countries’
sovereign bond yields went down by 200-250 basis points – that’s much
more than anything you can achieve by a reduction in the short-term
policy rate,” the ECB chief stressed.

Nor is that positive impact confined to bond markets, he said.
Draghi pointed to recent stock market developments and noted that credit
costs for companies in the periphery have come down significantly. He
also observed that more encouraging signals have emerged recently from a
spate of confidence indicators.

As in previous press conferences, Draghi stressed the importance of
ongoing deficit-cutting and reform efforts by Eurozone member states as
well as progress on European governance and bank resilience to “ensure
an adequate transmission of monetary policy.”

For now, it appears that the Council has some hope that easing in
the pipeline, in conjunction with possible further improvement in the
transmission mechanism, could allow the ECB to keep the refinancing rate
at 0.75%.

Still, the dismal growth outlook and weak inflation projection
leave little doubt that it would only require a small hick-up in the
crisis to force the ECB’s hand. A rate cut in early 2013 thus remains a
distinct possibility.

Draghi did not shed further light on whether the ECB would move the
deposit rate into negative territory should it cut the refi rate
further. “We are operationally ready, but the discussions did not go
into depth with respect to this point,” he said. “We briefly touched
upon the complexities that such a measure would involve and its possible
unintended consequences.”

— Frankfurt bureau: +49 69 720 142; email: jtreeck@marketnews.com

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