Reporte : ECB holds fire; Draghi ups pressure on politicians

‘A few’ ECB members wanted immediate rate cut: Draghi

FRANKFURT (MarketWatch) 

European Central Bank President Mario Draghi sat on his hands Wednesday, making no major changes to monetary policy and putting added pressure on European leaders to address the euro-zone’s escalating debt crisis

“Some of the problems in the euro area have nothing to do with monetary policy, “ Draghi told reporters at his monthly news conference. It’s not appropriate for ECB policy to take the place of other players’ “lack of actions,” he said
The ECB on Wednesday, as expected, left its key lending rate unchanged at 1%. Draghi, in his monthly news conference
Draghi offered little indication the ECB is ready to provide a further round of long-term liquidity injections via three-year long-term refinancing operations, or LTROs, in an effort to quell rising market tensions

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Draghi announced that the central bank would continue to provide liquidity to markets via nonstandard measures that have been in place since the early days of the financial crisis
That includes loans via fixed-rate, full-allotment medium-term refinancing operations and three-month LTROs, but economists said such moves were the bare minimum the ECB could offer
“This was a wasted opportunity
 Today the ECB could have actually used some of its financial muscle, instead President Dragjhi has opted to place pressure on the euro-zone leaders to forge a policy that will address the lack of growth and sovereign debt crisis that haunts the single currency bloc,” said Stephen Pope, managing partner at Spotlight Ideas in London.
Spanish government bond yields have neared crisis levels seen last fall, while the yield premium demanded by investors to hold Spanish bonds over German bunds last week hit a euro-era high
Fears that Spain’s troubled banking system will force Madrid out of credit markets combined with uncertainty over the impact of a potential Greek exit from the euro-zone have undercut European and global equity markets and put heavy pressure on the euro in recent weeks
Draghi said interbank markets are very “dysfunctional” and said downside risks to the economic outlook have grown
“The ECB thinks that in the current dysfunctional market environment (and these are very strong words coming from the ECB) cuts in rates would be ineffective
This may indeed be the case but we hope that the decision not to cut rates was not instead motivated by a failure to understand how serious the situation is,” said Marie Diron, senior economic adviser to the Ernst & Young Euro-zone Forecast, in emailed comments
That said, Draghi did open the door to a rate cut in July, telling reporters that “a few” members of the ECB Governing Council had argued for an immediate rate cut. Draghi said the decision to leave rates on hold was taken by “broad consensus.”
That makes the ECB likely to cut its key lending rate to 0.75% in July, said Howard Archer, chief European economist at IHS Global Insigh
The rate has never been set below 1% in the ECB’s history
Business surveys and hard data point to a contraction in second-quarter gross domestic product in the euro zone after a flat economic performance in the first three months of the year., economists said
What’s more, data, including German April industrial production figures released earlier Wednesday, indicate the slowdown has seeped into the core of the region
German industrial production contracted 2.2% from the previous month in April, the country’s federal statistics agency said. Purchasing managers’ indexes for the region showed euro-zone private-sector activity contracted at its fastest pace in nearly three years in May
Draghi has maintained that it remains up to euro-zone governments to come up with solutions to the region’s continuing debt crisis, while playing down tensions in interbank lending markets.
Kathleen Brooks, research director at Forex.com in London, said the ECB was right to keep rates on hold
“The main reason we think that rates should not be cut is that we don’t think a cut would have a big impact on the markets or the struggling euro-zone economies as they go through a tough period of austerity,” she said.
Restarting the ECB’s bond-buying Securities Market Program would be the more effective way to tackle the current crisis, pulling down Spanish and Italian bond yields and targeting the “epicenter” of the problem
Draghi, however, offered little indication a move was likely, telling reporters that LTROs and the Securities Market Program were “there,” but were “temporary and not infinite.”