–Others Are Not Convinced Council Feels Any Urgency To Reduce Rates

PARIS (MNI) – Many of the analysts who listened to European Central
Bank President Mario Draghi on Thursday said they were struck by
Draghi’s comment that there had been a “broad” discussion about the
bank’s interest rate policy, which they interpreted to mean that a rate
cut – perhaps early in the New Year – was on the table.

Others argued that the ECB’s decision to keep rates on hold meant
that the more optimistic Council members who are seeing “green shoots”
still held sway. It would take a significant deterioration of economic
conditions to induce an interest rate reduction, one of those analysts

Excerpts of analysts’ comments are below:

KEN WATTRET, BNP Paribas: “The view we took ahead of this month’s
meeting was that the ECB would give the impression of having a bias
towards more easing but without a sense of urgency to act quickly. We
stick with this view, though we recognise that the new projections, at
face value, imply a higher probability of near-term action.”

MARCO VALLI, Unicredit: “The ECB’s new set of CPI/GDP projections
was more dovish than we had anticipated and, unsurprisingly, someone in
the GC today wanted to cut the refi rate. However, the ECB still regards
the monetary stance as accommodative, and we therefore remain happy with
our forecast of no more rate cut(s) going forward.”

VIOLA JULIEN, Helaba: “Draghi’s remarks that a broad discussion has
taken place in the Governing Council on the level of interest rates has
heated up speculation that there could be another interest rate cut at
one of the next Council meetings. One has also seen in the market
reaction that many participants believe that there might be something
coming. The Bund future has gained quite nicely as a reaction.”

JAMES SHUGG, WestPac Banking: “We were impressed by the realistic
forecast for 2013 anyway. We were expecting a multiple-year recession in
euro land for some time and the ECB is now acknowledging that is the
situation. We question whether there will be growth in 2014, which is
what they’re effectively forecasting at this stage. But certainly their
forecast for next year is realistic. We don’t think that they’re going
to cut interest rates. The ECB has done pretty much what it can in terms
of policy adjustment. It’s now up to the OMTs to be triggered at some
point. Our formal forecast is no more cuts, but we do think the balance
sheet will expand during 2013, as they buy bonds off the market –
Spanish bonds, maybe Italian as well, possibly even French towards the
end of the year. There will also be further refinancing operations that
will effectively lift their balance sheet. We think their balance sheets
will be expanded and that will be a form of easing.”

MARIO GRUPPE, Norddeutsche Landesbank: “The signs are increasing
that the ECB will become active once again. Draghi repeated his
assessment that growth expectations remain tilted to the downside.
Moreover, the growth and inflation projections were quite markedly
revised. Both are an indiction that there exists quite some leeway to
lower interest rates. And then there was Draghi’s remark that the
Governing Council had an extensive discussion about interest rates. One
hasn’t yet all that much experience with the wording of Draghi — he is
not as clear as Trichet used to be — but in my view this was a signal
that the ECB plans to play this ace [of an interest rate cut]. Thus, we
stick to our forecast that the ECB will cut interest rates by 25 basis
points at the start of the year. If there is not an economic improvement
they will do this. Obviously, the impact of this would be very limited.
Draghi today said relatively clearly that the OMT brought more easing
than any interest rate cut could ever do. Actually, this is speaking
somewhat against a rate cut, but on the whole we believe that the ECB
will take this interest rate cut step.”

CARSTEN BRZESKI, ING: “It looks as if there are diverging views on
the economic outlook within the ECB. At face value, the sharp downward
revision of the growth outlook for 2013 and lower inflation could have
been an ideal invitation for another rate cut. Draghi’s comment that
there was a ‘prevailing consensus’ to leave rates unchanged indicates
that some ECB members must have been in favour of a rate cut. The
decision to keep rates on hold, at the same time, shows that currently
more ECB members believe in green shoots sprouting in the winter and
half-empty glasses turning half-full rather than in their own staff’s
projections….A rate cut might not entirely be off the table but would
require an even worse weakening of the economy.”

RAINER SARTORIS, HSBC Trinkaus: “It was striking that the ECB was
quite pessimistic today in its growth forecasts, even more pessimistic
than the market consensus which isn’t often the case. The ECB doesn’t
see large inflation dangers and on growth it continues to point out that
risks remain on the downside. Okay, one can argue about what an interest
rate cut would really achieve at the present time. I mean, interest
rates are already way down, money market rates are even lower, and in
the end the problem is the disturbed monetary transmission channel.
Nevertheless, when Draghi says that there was a broad discussion on this
topic, then there seem to be some in the Council which would have liked
to cut interest rates already today. Thus, an interest rate cut remains
on the agenda. Still, I would argue one shouldn’t expect a large
stimulus for economic momentum from an ECB interest rate cut. We expect
that the ECB will move at the start of the year.”

BENJAMIN REITZES, BMO Capital Markets: “I think the only thing that
was (not quite expected) was the discussion of rate cuts. It looks like
there were some on the council who thought rates were appropriate. But,
even with the downgraded forecasts and downside risk to the growth
outlook, it doesn’t look like the ECB is ready to cut rates just yet.
It’s clear by this decision that they’ll probably need to see some
downside risk to price stability as well before they’re willing to move
on rates. I think there is room for cuts. They can cut another 25
(points). I don’t think there will be surprise to see that in the first
quarter of next year. How much of an impact will it have? Probably not

FREDERIK DUCROZET, Credit Agricole: “The tone of today’s press
conference was even more dovish than I had hoped for. I was expecting a
rate cut today…and clearly the ECB almost cut rates today. Not only
did they discuss the option, but based on Draghi’s comments, I think
that a larger number of Governing Council members pushed for a cut today
compared to last month. So, this is a first clear indication that the
dovish bias remains and probably strengthened over the last month,
despite the tentative improvement in some indicators. The second
important aspect of course, and quite a shocker in my opinion today, was
the downward revision to GDP and inflation forecasts from the staff, in
particular the first projections for 2014, with inflation on average
seen at +1.4%. This is the first time the staff are projecting such low
levels of inflation over the medium term. The last time we had such a
low level was in December 2009. So, I think two elements clearly reflect
a much stronger dovish bias within the Council than one month ago. For
those reasons I’m still expecting a rate cut early next year, most
likely by March when the staff projections are updated again.”

PETER CHATWELL, Credit Agricole CIB: “Draghi left the door open to
a possible cut in the deposit rate into negative territory. That has the
potential to move the floor for market rates significantly lower. The
front end has been pinned at zero for a long time and Draghi’s comments
gave the front end something to go on.”

JAMES ASHLEY, RBC Capital Markets: “ECB President Draghi gave away
few clues on the likely future direction of policy at today’s press
conference, but nonetheless managed to keep the door ajar for a further
possible easing next year should the economic outlook deteriorate
further….Overall, we continue to see policy rates on hold for a
prolonged period of time – but further monetary easing of policy should
not be dismissed, whether through a rate cut, or (a risk
underappreciated, in our view) through any of the other options open to
the Governing Council including asset purchases.”

–Paris newsroom, +331-42-71-55-40; bwolfson@mni-news.com

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