PARIS (MNI) – ECB watchers attuned to the recent deterioration in
economic indicators for the Eurozone found plenty of grist for their
analytical mills in ECB President Mario Draghi’s more cautious outlook
for a recovery this year.

After Thursday’s press conference, some see now an interest rate
cut around the corner if there is no turnaround in signs that the
economy is nearing or already slipping into recession. They argue that
Draghi’s more relaxed tone on inflation signals leeway for further
conventional monetary easing. Others argue that the ECB is more likely
to extend its existing liquidity measures rather than activate the rate
lever.

There is basic agreement that the coming weeks’ data will be
decisive for any shift in the policy stance and that the ECB staff’s
fresh economic projections in June are likely to reflect the growing
uncertainty Draghi repeatedly mentioned.

Following are excerpts of analysts’ comments:

JOERG KRAEMER, Commerzbank: “As expected, at today’s press
conference ECB president Draghi did not signal an imminent rate cut.
However, he softened somewhat his tone on inflation and growth. In the
end, the ECB would cut rates if the recession did not come to an end
soon. Otherwise, Draghi’s comments suggest that the ECB is not prepared
to help finance ministers with another three-year tender, though we
would forecast this if the sovereign debt crisis were to escalate.”

CEDRIC THELLIER, Natixis: “President Draghi’s tone was quite less
hawkish about inflationary risk than one month ago. Besides, BLS results
suggest the threat of a major credit crunch (and deflationary risk) to
be less important than it was three months ago. However, vulnerabilities
to the sovereign crisis remain and the fall in credit demand calls for
prudence even if expected to be much less negative in Q2 2012. Moreover,
as prevailing uncertainty on economic outlook was stressed, we guess the
Eurosystem staff projections for GDP growth – to be communicated next
month – would be revised somewhat downwards. All in all, while we still
favour a long lasting status quo at 1% for the refi rate, we cannot rule
out a further rate cut over the months to come.”

PAUL MORTIMER-LEE, BNP Paribas: “If there is to be ECB rate action
going forward, it will be motivated by a cyclical weakening that causes
a downward revision to price forecasts and risks, not by political
pressure on the ECB to try to solve more structural growth issues. Mr
Draghi gave himself the wiggle room to deliver rate action should the
data continue to come in very weak, but he clearly wanted to avoid
fuelling expectations in this direction.”

MARCO VALLI, Unicredit: “In our view, the May round of business
surveys will be key to assess the risk of conventional easing in the
coming months. This is because a further decline in some of the most
watched growth indicators – like the PMIs and the EuroCOIN – will
probably induce the central bank (and us too) to change the baseline
scenario and revise downwards the 2012 GDP forecast. Today, the monetary
stance was described as accommodative, but the Draghi-led ECB has
already shown in the past that it can move swiftly if needed.”

TORGE MIDDENDORF, WestLB: “From the statement, I think you can read
that the ECB is a bit more careful when it comes to the economic
situation in the Eurozone and that there are some dangers ahead. I think
the ECB is a bit more careful when it comes to growth prospects. When it
comes to inflation prospects, I think that the ECB is a bit more
relaxed. Draghi said that the risks to the inflation outlook are rather
balanced. He stressed that a bit more compared to last month. It seems
that in April he is a bit more worried that we could see some
second-round effects from higher energy prices, but the ECB seems to be
a bit more relaxed this time. So, all in all, I think we are getting
closer to a rate cut. It’s not a done deal for June. The ECB did not use
any buzzwords that point to rate cut in June. But we think that when we
have one more month of rather weak economic data, that the ECB will
actually cut interest rates once more in June.”

JAMES SHUGG, Westpac: “Basically quite a few language changes,
which shows that they have been somewhat surprised by the data flow
during April. In their published staff forecasts next month, there is
going to have to be a downgrade to the growth view for this year.
Something like -0.8% to 0.0%, from -0.5% to +0.3%, which is the current
forecasts. They’re edging towards possibly recognizing that they might
have to cut rates. Whether it comes as soon as June all depends on what
bad news emerges in the meantime. What they are basically doing is
sending a signal that they are a little bit less focused on the
inflation risks, which are still balanced [and] that they are going to
downgrade their growth number. The downside risks to inflation from
growth are crystallizing. The downside risks to growth are
crystallizing. So, I think they are closer to another rate cut than they
have been all year. Inflation doesn’t matter this year. What matters is
what growth is this year and what inflation is next year. If you have
got a recession this year, inflation isn’t going to be a problem next
year. It is irrelevant what inflation does in the next months.”

CARSTEN BRZESKI, ING: “In our view, Draghi’s call for a growth
compact is a plea to politicians, not a hint to further rate cuts. To
the contrary, the history of the ECB has shown public pressure on the
ECB can be very counterproductive. Remember former ECB President
Duisenberg’s saying that central bankers are like cream – the more you
whip them, the stiffer they get. With today’s press conference, Draghi
has sent a painful reminder that the ECB cannot solve the current
crisis. The ECB will not hesitate to accompany and smoothen this
adjustment process but national governments have to be in the lead to do
the dirty work. As a result, there does not seem to be any quick fix or
alleviation for the economy in the offing. An inconvenient truth.”

MARIO GRUPPE, Norddeutsche Landesbank: “The press conference was
unspectacular. There weren’t any real surprises. Draghi sounded a bit
more sceptical on the growth outlook and somewhat more moderate on
inflation prospects. Still, in our view the ECB will keep rates
unchanged for the months to come — if there isn’t any unexpected
external shock like a worsening of the debt crisis, for example.”

JULIAN CALLOW, Barclays: “Our strategists believe that it is very
likely that there will be an extension of full allotment in all the
ECB’s regular refinancing operations (the weekly MROs, the monthly
operations and the 3m LTROs) to be announced on June 6th: probably, this
will be until mid-January (to take account of the roll over year end and
expiry of the first 3y LTRO). In our view, there is only small scope to
lower official interest rates, particularly if the ECB is concerned
about the market repercussions of having zero interest rates – in this
case, potentially it could cut the deposit rate, perhaps from 0.25% to
0.10% or 0.05%. A cut in the main policy rate could offer some benefit
to banks’ net income (since the spread of refi rate over deposit rate
would be narrower), although at the same time in so doing it might be
seen as a move which could encourage further dependency on non-standard
measures by banks, by lessening the small penalty on borrowing in LTROs.
Overall, in our view, the challenge for the ECB at present is that it is
not so easy to ease monetary policy further without crossing the highly
significant threshold of going into fully fledged asset purchases (QE).”

–Paris newsroom, +331 4271 5540; Email: ssandelius@marketnews.com

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