PARIS (MNI) – Financial market analysts said today’s interest cuts
by the European Central Bank were too timid to have a major effect,
though the ECB’s reduction in its deposit rate to zero did take them by
surprise.

Given the Eurozone’s economic weakness, many analysts predicted
that the ECB would cut is main refinancing rate again, to 0.5%, by the
early autumn. One even said a negative deposit rate had become possible.

ECB President Mario Draghi made clear the central bank was not
contemplating any new non-standard measures at the present time –
whether sovereign bond purchases or new LTRO. Nonetheless, many analysts
said they believed that as the economy continues to flounder and the
financial market feel-good effect of last week’s EU summit wanes, the
central bank will need to come back in with another major intervention,
probably on the liquidity side.

Excerpts of the analysts’ comments are below:

ULRICH WORTBERG, Helaba: The most interesting thing was that the
deposit rate was cut to zero. In my view this has surprised the market
somewhat. Draghi did not give any hint that the ECB is ready to do more.
But currently you cannot rule anything anymore. It is possible that the
ECB might lower rates further to 0.5%, yet it remains unclear how much
this will really affect the real economy.

JOERG KRAEMER, Commerzbank: “At today’s meeting the ECB
unexpectedly cut the deposit rate to 0.0%. This and the [already]
expected 25 basis point reduction in the refi rate will not help the
Eurozone economy, but highlights how determined the ECB is to use all of
its weapons. Although the ECB today did not announce additional
non-standard policy measures, we expect further easing of collateral
rules and probably new long-term tenders if the crisis were to escalate
again in the months ahead. Elsewhere, ECB president Draghi positively
commented on last week’s controversial summit results which show by how
much the ECB has moved in the direction of politicians.”

MARTIN VAN VLIET, ING: “We get the impression that the ECB feels it
has done enough for the time being, and that it is again up to Eurozone
politicians to make further progress in resolving the debt crisis. So in
the end, we got a 25-bp cut in the refi rate, a rather experimental move
in the deposit rate all the way to zero, partly aimed at discouraging
‘core’ banks hoarding cash at the ECB, but no sign whatsoever of any new
unconventional measures. In short: enough not to disappoint.”

JUERGEN MICHELS, Citigroup: “While we expected the 25-bp cut of the
refi rate, the ECB surprised us with its unanimous decision to set the
deposit rate to zero. We expect that more downside risks to the ECB’s
still benign growth outlook will materialize and that the sovereign and
banking crisis will escalate further. Therefore, we continue to expect
the ECB to cut the refi rate to 0.5% and we now regard a negative
deposit rate of minus 0.25% as possible. But unless there is a sharp
fall in activity data in July, such rate cuts are unlikely before
September. Although, not being discussed today, we continue to expect
the ECB to take further non-standard measures, including easier
collateral rules and more multi-year LTROs – maybe as early as August.”

TOM VOSA, NAB: “It was the usual kind of language heard from Draghi
– overall an upbeat performance from him. The rate cut met market
expectations, which shows that ECB is still willing to use conventional
monetary policy to stimulate growth…What Draghi seems to have done is
to downplay the ‘August Condition’ – ie, ‘the ECB have done their bit,
thanks, have a great summer.’ They’re unlikely to have any other
reactions until September, with no summits in August, etc.

CEDRIC THELLIER, Natixis: “We doubt this rate cut will be effective
in reviving credit to the private sector, in alleviating tensions in the
financial markets, in restoring confidence. As the global macroeconomic
picture is likely to be quite the same over the coming months – with
downside risks prevailing – will a further rate cut be decided? We
cannot rule it out. Will it be effective? Probably not. This might pave
the way to further non-standard measures: another LTRO is then more
likely than a significant reactivation of the SMP.”

TIM OHLENBURG, CEBR: “While unsurprising given the world economic
outlook, the reduction nevertheless sets a record low for Eurozone
interest rates – even during the height of the financial crisis, rates
were only pushed down as low as 1.0%. Despite moving into uncharted
territory, cheaper money is unlikely to have much impact on the European
economy…The relief rally after the latest Eurozone summit will fizzle
out soon enough and the global slowdown should offer a convenient excuse
to leverage the ECB balance sheet in support of ailing sovereign
borrowers.”

CHRISTIAN SCHULZ, Berenberg Bank: “The timid policy response of the
ECB makes the Eurozone very vulnerable to intensified market panic. On
the positive side, the small rate cut reduces funding costs, especially
for banks in the periphery. But it is not enough to calm markets and
afford Europe time to show positive effects of the national
reforms…The ECB should have done more to stimulate demand for Italian
and Spanish sovereign bonds by at least announcing a new 3-year LTRO.
Negative news of reform fatigue in Southern Europe or rescue fatigue in
Northern Europe can quickly spark sell-offs in Spanish and Italian bonds
again. In that case, Europe will again have to react. The pain threshold
of the ECB for further action has not been reached yet, but events over
the next few weeks can quickly bring us there.”

BRENDAN BROWN, Mitsubishi Securities: “The official rate cut itself
is of virtually zero consequence. No one pays the official rate. In
Germany rates are well below the official. In Spain and Italy, etc.
rates are well above. In fact during a week in which there has been much
discussion of LIBOR fixing in 2008, the much bigger issue is what
EURIBOR means under present conditions of a disintegrated European money
market. There has been some disappointment that Draghi appeared to rule
out further purchases of Italian and Spanish government bonds. But I had
thought that few expected this in any case.”

JULIAN CALLOW, Barclays: “With the deposit rate (which sets the
floor for Eonia) now at zero, there is a big question mark over whether
the refi rate will be cut any more – particularly since in our view the
ECB is at risk of over-estimating the decline in HICP inflation during
the next twelve months (after allowing for likely VAT increases and the
current oil curve).”

KEN WATTRET, BNP Paribas: “Where does all this leave us? From a
markets’ perspective, disappointed. In particular, the impression given
was that there are no more unconventional measures in the pipeline. This
looks like a tactical error…We see a 25-bp cut in September in tandem
with downward revisions to the staff projections as the most likely
outcome. The chances of a cut as soon as August looked slim on the basis
of what was said in the press conference, but if market conditions
deteriorate markedly, with spillovers to confidence, then you never
know.”

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