ECB Leaves Rates Steady but Hints at Future Cut

April 4, 2013 8:36 pm Last Updated: April 7, 2013 12:39 am

The European Central Bank (ECB) left its key rate unchanged April 4, but hinted at a cut later that year. President Mario Draghi cited risks to the economic recovery and said the ECB was ready to act.       

“Against [the] overall background our monetary policy stance will remain accommodative for as long as needed,” the ECB stated and Draghi later told reporters at a press conference that the ECB was “ready to act.”

The ECB downgraded its economic outlook and most likely wanted to reassure the market that it would provide further easing if necessary. “Weak economic activity has extended into the early part of the year and a gradual recovery is projected for the second half of this year, subject to downside risks,” it stated.

The main policy rate staid at 0.75 percent, compared to around 0 percent for the Federal Funds Rate in the United States.

Draghi furthermore assured markets that a Cypriot exit of the Eurozone is purely “hypothetical” and that there is “no plan B.”

“I think the ECB has shown its determination to fight any redenomination risk. And OMT with its precise rules and acting within its mandate, is there to this purpose,” Draghi told reporters, mentioning the Outright Monetary Transactions (OMT) program. It allows the ECB to buy up any quantity of government bonds if necessary and under certain conditions to prevent a member country from exiting the euro.

Some market participants remain skeptical, despite the prospects of a rate cut: “For us a rate cut is symbolic and would not resolve the problems existing in the Eurozone … which is hamstringed by poor interbank lending, fiscal crises and growth crises,” writes Citigroup’s Byron De Jarne in a note to clients.

He also thinks the OMT is inadequate for fighting denomination risks. “The OMT is vague and the concessions needed for its activation is a de-facto surrender of sovereignty,” he writes.