The European Central Bank Governing Council has decided to keep on hold its refinancing rate, even if growth prospect are slightly weaker than previously foreseen. The ECB hopes the turning point will materialize in the coming months giving rise to 1.1% increase in GDP next year, driven by higher exports, subdued inflation and a helping hand from monetary policy. The current easing will continue to support activity, even if governor Mario Draghi openly acknowledges that credit squeeze is hurting the private sector, a 0.6% recession being expected this year.
Yet, action under non-conventional schemes has been discarded. Draghi emphasized in the press conference the complexity in accepting asset-backed-securities supported by loans to SME as collateral. Little support is to be expected from the ECB in redressing the bottlenecks that currently prevent bank liquidity feeding the real economy with credit. The ECB would be ready to run negative rates, should deflation loom in future but it adamantly opposes going down the road other central bankers have taken in dealing with stagnation (Japan) or lower than warranted growth (the US).
No one believes the Frankfurt-based institution being ready to take any bold step. The most ambitious one up to now, a sovereign bond-buying plan tailored to boost confidence in ailing public finances, remains unused. Heralding this Outright Monetary Transactions scheme as “the most successful monetary policy measure in recent times” seems largely overdone. For if the merit linked to an intervention lies in the ability to perform its task without spending a single penny, no measure involving massive support is likely to be implemented in future.
The ECB has made crystal clear it has no intention to undertake any extra effort in helping the economy to overcome its current recession. Its message utterly fails to provide confidence to the markets, when that need proves now more vital than ever. Hard-pressed Governments in Southern Europe have voiced their concern for the credit-crunch that cuts short any hope of recovery. But their request for a more active stance by the ECB will continue to be ignored. Berlin holds the key to unlock that door but it will refrain from doing so, thus ensuring no one has the temptation to break away from fiscal virtue.