Today's ECB Meeting Could Go 'Right Down To The Wire' - Here's What You Need To Know
The big question going into this month's meeting is whether the ECB will cut the benchmark refinancing rate in the eurozone – which currently stands at 0.75 percent – in order to provide a bit of additional stimulus to a a euro area economy that continues to deteriorate.
In a preview of the decision, Société Générale economist James Nixon says that "Thursday’s ECB meeting could go right down to the wire," adding that the decision is "likely to prove a particularly close call with a significant expectation that the ECB will cut interest rates again."
However, Société Générale doesn't see the ECB cutting interest rates tomorrow. Neither does Citi economist Jürgen Michels, nor do Deutsche Bank economists Mark Wall and Gilles Moec.
The Wall Street economists all cite the same reason the ECB will keep interest rates on hold: recent economic data in the eurozone have signaled improvements – the rate of deterioration, at least, is slowing for now.
Here is how Michels paints the picture:
In addition to the second consecutive increase in the composite PMI, by 0.7 points MM to 47.2 in December (highest reading since March 2012), the three national sentiment indicators that were explicitly mentioned by ECB President Mario Draghi at the December press conference, improved further in December. The German ifo sentiment index (+1.0 points MM to 102.4, the highest reading since July 2012), the French INSEE index (+ 1 point MM to 87, the highest reading since August 2012) and the Italian ISTAT business confidence index for the manufacturing sector (+0.4 points to 88.9, the highest reading since June 2012) all increased for a second consecutive month in December.
Improvement in the indicators likely makes the decision a little easier for the ECB, but there is also another very basic point about interest rate cuts: given how much the mere introduction of the OMT bond market intervention program has been able to bring down interest rates in the periphery, the impact of a small cut to the refi rate likely won't have much incremental impact.
That's why the ECB is going to want to save rate cuts in case it has to deal with additional shocks in the future, says BofA Merrill Lynch economist Laurence Boone in a note to clients.
Boone outlines what she sees as the key risks the ECB is probably holding on to rate cuts in case of:
In our view, there are two main types of risks: country-specific risks, related to politics in some countries; and risks related to the EU governance process.
Country-specific risks in 1Q13: although there has been an agreement on easing risks related to the fiscal cliff, the fiscal adjustment will weigh on US economic activity in the short-term, with spillover effects on the rest of the world’s economic momentum, and negotiations for the debt ceiling could yield further market volatility (see After the cliff: three great gorges). As well, tensions in Spain could heighten first if the market started seeing reluctance in the ECB’s rescue plans, and second if austerity was to destabilize somewhat Catalonia's government. Political uncertainty could increase in Italy if polls suggest an unclear outcome (though Mario Monti's involvement is a positive); and tensions in Cyprus could spill over to other periphery countries.
EU institutions: we do not expect major progress in euro-area governance, but the usual fiscal surveillance procedure could yield some volatility should it highlight some difficulties in program countries to reach their targets either for 2013 or because final figures for 2012 were to reflect higher-than-expected slippage. In this respect, discussions around Spain’s budget figures (on 21 January – as part of the Stability and Growth Pact process, on 13 February when the European Commission publishes forecasts for 2013 and updates 2012 numbers, followed by a eurogroup meeting on 4 March) may be closely watched by markets, ahead of a large bond redemption in April.
Deutsche Bank's Wall and Moec agree that some bad economic data could give the ECB the impetus for a further rate cut in the coming months.
The two economists write that given the fact that a rate cut was already "widely discussed" at the December meeting, it might not take much:
Nonetheless, it might not take much in terms of data disappointment to tip the balance from “widely discussing” to actually cutting rates. In mid-February Eurostat publishes the flash estimate for Q4 GDP. The pace of contraction will deepen compared to Q3 (-0.2% qoq) and may provide the trigger. On the other hand, a gradual further recovery in the surveys through the quarter could steady the ECB’s hand. A 25bp refi rate cut in March remains out baseline, but is not a given.
The ECB announces its decision Thursday morning at 7:45 AM ET, followed by a press conference led by Mario Draghi and Q&A at 8:30. Follow it all LIVE on Business Insider >
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