- Eurozone: The ECB takes actions to stabilise markets � At today?s Governing Council meeting, the ECB, as expected, decided to leave key policy rates unchanged. The refi rate was left at 1.5%.
- While its standard measures, (interest rates) remained unchanged, the Council adopted important decisions regarding its non-standard measures, used to smooth the functioning of the market and to allow the monetary transmission mechanism to work.
- The ECB decided to conduct a 6-month Longer-Term Refinancing Operation (LTRO) on 9 August. In addition, all refinancing operations will be conducted at full allotment also in Q4. Last but not least, the Council re-activated its Securities and Market Program (SMP), under which it buys debt securities on the secondary market.
- �The Bank did not change its assessment of price developments, reaffirming that price pressures are on the upside. However, it slightly changed its growth assessment. � As economic conditions have deteriorated, the ECB could decide to slow the pace of monetary tightening. �
The ECB takes actions to stabilise markets.
At today?s Governing Council meeting, the ECB, as expected, decided to leave key policy rates unchanged. The refi rate was left at 1.5%.
While its standard measures, (interest rates) remained unchanged, the Council adopted important decisions regarding its non-standard measures, used to smooth the functioning of the market and to allow the monetary transmission mechanism to work. Tensions in the market intensified over recent days as stressed by the increase of the 3-month OIS/BOR spread (see chart 1). In addition, despite all tender procedures are still conducted with full allotment and liquidity is still above needs, the use of deposit facility at the ECB rose markedly, which is another sign of stress (see chart 2). Under these conditions, the Council decided to conduct a 6-month Longer Term Refinancing Operation (LTRO) on August 9 th ). In additions, all refinancing operations will be conducted at full allotment also in Q4.
Last but not least, as tensions in the sovereign debt crisis intensified, with Italian and Spanish yields reaching new highs, the ECB decided to re-intervened in the debt market. The ECB stopped buying debt securities at the end of March 2011. The use of the Securities and Market Program (SMP) continues, however, to create divisions within the Council. While the Council was unanimous regarding decisions on interest rates and on nonstandard lending measures, it decided by majority regarding the reactivation of the SMP. Some members of the Council are indeed extremely worried by buying debt securities, as this could undermine the ECB independence from fiscal authorities.
The Bank did not change its assessment of price developments, reaffirming that price pressures are on the upside. However, it slightly changed its growth assessment. The risk that the persistent tensions in financial markets spill over to the real economy has increased. The ECB, says that downside risks to its growth assessments may have intensified?.
This could reinforce market perceptions that the ECB will not raise policy rates for a long time. Just before the current tightening cycle began in April 2011, the 3-month implied rate on deposit rate futures for December 2011 was 2.175%: a risk premium of 30-40bp would imply a refi rate in the range of 1.75- 2%. Today, market expectations are flat (see chart 3) and do not suggest any further increases in key rates.
In the current tightening cycle, the ECB has been raising interest rates each quarter, and precisely in the month after the presentation of its new inflation and growth projections. If this pattern is maintained, the ECB would deliver another interest rate hike in October. Deteriorating economic conditions could push the ECB to postpone, further hikes ��
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Source: http://www.fxstreet.com/fundamental/economic-indicators/ecoflash/2011-08-04.v02.html
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