What a difference a 0.25 makes

MADRID | The European Central Bank did surprise some in the Madrid's financial City when lowered rates to 1.25% on Thursday. The first meeting with Draghi as president of the institution concluded with a cut in the intervention rate of 25 basis points down to 1.25%. The rate corridor now stands at 0.50% for deposit facilities and at 2% for credit facilities. Among other aspects of the released statement and subsequent press conference, Bankia think worth mentioning these:

“Growth: tensions in the financial markets are likely to affect growth in the euro zone in the second half, which is expected to be very moderate. Looking ahead toward 2012, ECB's president Mario Draghi sees as likely a significant downward revision in the forecasts.

“Inflation: inflation to remain above the 2% target during the remainder of the year, but it will be below in 2012. Mr Draghi says that he sees no risk of deflation, but also notes that the weak growth will have effects on costs and wages.

“Monetary policy: Mr Draghi reminded that all unconventional measures are temporary.

“Financial sector: he supports the decision of the EU to strengthen bank capitals, while noting that they should not deleverage in excess.

Regarding the debt crisis, the new ECB's governor requested that the governments of the most pressured countries take the necessary additional measures and that they accelerate the implementation of the promised structural reforms. In an additional comment, though, he rejected the idea of becoming a last resort lender and replied that a situation of a European Monetary Union member leaving the euro is a scenario not contemplated in the EMU Treaty.

The ECB confirmed that the rate-cut decision had been adopted unanimously and the greatest reason was the weak economic data and the absence of lasting inflation tensions. Mr Draghi said that the bond purchase program is temporary; it is limited in terms of quantity and is part of the monetary policy. Yet,

“he does not consider the reduction of bond yields as his responsibility; this is a task that the governments through their fiscal policies should deal with,”

a remark that was heard clearly and loudly in Madrid. The initial reaction of the markets was positive, because of the surprise and even the hope for stronger measures on other fronts was harboured. However, as Draghi's press conference advanced, these hopes chilled thus reaching a more neutral result. For Bankia,

“In our opinion, with Draghi at the front, it seems that the ECB's management will be different from how it was with Trichet. The new style could be characterized by greater activity. We consider as positive the decision that ultimately supposes an attempt to 'get ahead of the market.'”

zp8497586rq