The ECB kept its key rates unchanged at today’s meeting and gave no new signals regarding future policy actions. The ECB intends to keep its policy rates at the current level or lower for an extended period. On the much awaited indications about the likelihood of a new LTRO, Draghi kept the door open to consider all possible available instruments, but had no concrete plans. He highlighted that there is not a specific excess liquidity level where money market rates would be expected to start rising and that one should not draw too many conclusions from the repayment pace of banks. All in all, this is in line with Draghi´s comments last week and from the press conference in September.
Rates drifted higher during the press conference and the currency strengthened even though Draghi didn´t share much new information. After quite a few dovish ECB board member speeches last week, expectations may have been tilted towards a somewhat softer tone today, which failed to materialize, thereby pushing rates higher.
All options remain open, including a new LTRO
The ECB remains particularly attentive to the fall in excess liquidity, which probably indicates that it remains concerned about the current market pricing despite the recent drop in rates.
We still do not see the case for the ECB to do an LTRO just to keep excess liquidity in the system. If concerned about money market rates, the ECB could cut its refi rate and strengthen its forward guidance.
As mentioned in our preview, we do not expect a new LTRO, though the ECB is likely to keep the option open for some time.
Risks remain skewed to the downside
Key figures continue to surprise on the upside and point to a modest recovery for the remainder of the year. Still, the ECB sees growth risks skewed to the downside.
Market rates have dropped following Fed’s tapering postponement, the US shut down and the rise of Italian political risks, but the ECB still sees to high market rates as a key downside risk to growth.
Thus, the main message from Mr Draghi was unchanged, ie the economy is gradually recovering, but risks remain on the downside and market rates are too high. The ECB remains dovish and ready to act using all available instruments.
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