Market Overview

The ECB May Act After Seeing June Forecasts.


The European Central Bank kept its main interest rate unchanged at a record low of 0.25%, as widely expected.
The ECB President Mario Draghi said that the European Central Bank may consider non-standard monetary policy measures at its June meeting following publication of updated economic forecasts by the bank's staff. In his opinion the strengthening of the euro in the context of low inflation and still low levels of economic activity is a cause for serious concerns. Draghi said also that too-prolonged period of low inflation de-anchors medium-term inflation expectations. He repeated that the ECB was not resigned to low inflation.
Draghi said today that an increase in the amount of liquidity in the Eonia market was a positive sign that banks were going back to trading on that market. The ECB has highlighted a tightening in short-term money markets as one of the scenarios that could trigger policy action. In our opinion Draghi has made it clear that no new liquidity measures are considered.
The volatility on the EUR-USD rate is an indication of expectations the ECB will act at its June meeting. The rate was pips away from breaking through 1.40 but after seeing stronger hints of action in June in Draghi’s speech the EUR-USD moved below 1.39.
In our view an action in June is not a done deal. At the March meeting the ECB did not act despite strong expectations and macroeconomic forecasts from the ECB’s staff.  This time, however, signals are slightly stronger. Draghi described today’s meeting as a preview of the discussion for the June meeting, and said that the governing council “is comfortable with acting next time”.  In our opinion delivering a small cut in refinancing and deposit rates is the most possible step next month.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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