European Central Bank (ECB) President Mario Draghi spoke about the bank’s policy rate position at a recent press conference and also provided some insight into future plans on how to better respond to the Eurozone debt crisis. Draghi noted that the ECB will be easing collateral requirements for member countries, which is expected to increase liquidity and so allow for more investment in sovereign bonds. One justification for this is Draghi’s opinion that there is more stabilization in the Eurozone economy, although not so much to keep the ECB from lowering rates in continuing support of its Long Term Refinancing Operation. For more on this continue reading the following article from TheStreet.
In the press conference following this morning’s policy rate announcement President Mario Draghi did little to signal the European Central Bank’s future intentions but nevertheless provided some important takeaways.
First, as we have been recently highlighting the ECB widened its collateral requirements to include credit claims. This may support the recent improvement in financial conditions, as easing the collateral requirements is likely to provide more liquidity to the European banking system.
This in turn may also provide further support for the European sovereigns as the banks are expected to use the liquidity to purchase sovereign bonds. Draghi defended the ECB’s decision to ease collateral standards on a national basis and stressed that while the ECB will take more risk on collateral, it will manage the risk very well as conditions will be very stringent.
Second, on the economy the ECB sees tentative signs of stabilization. Draghi said economic data broadly confirm the ECB’s assessment but the outlook remains subject to "downside risks" amid "high uncertainty." Recall, despite the recent improvement in the headline survey measures, the forward-looking near orders component is still showing signs of contraction with readings below 50.
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The outlook to inflation remains "broadly balanced" but the Bank expects inflation to come down in the coming months. However, Draghi also highlighted the low rate of money growth and remains concerned about the overall credit conditions in the economy.
The ECB hopes that the Long Term Refinancing Operation will continue to remove some of these funding pressures from the markets and thus support the functioning of the euro area financial sector and the real economy.
That said, while the broad economic assessment has changed much since the last meeting, we expect the ECB to cut rates again by 25 basis points in March in order to ease financial conditions further to support economic growth.
Third and finally, Draghi appeared to sidestep questions on the ECB’s Greek bond holdings by saying that he can’t say what the ECB can do until after the euro group meeting. Yet he stressed that the talk about ECB sharing losses is "unfounded."
Nevertheless, we think it remains likely, according to recent media reports, that the ECB agrees to transfer its Greek bond holdings to the European Financial Stability Facility at costs, thereby avoiding a haircut, while still reducing Greece’s nominal debt stock.
The euro has rebounded against the dollar following the ECB press conference and off the back of news that the Greek prime minister’s office has confirmed a deal with the Troika.
Overall, the euro is continuing to advance as shorts are squeezed out of the market. We expect that the rally is likely to continue for the time being, given that the market appears to be net short euros.
From here, the next objective is 1.3435 followed by 1.360. Near-term resistance seen near 1.317 followed by the recent low of 1.303.
This article was republished with permission from TheStreet.