Photo: AP/Riccardo De Luca
The European Central Bank will make a highly anticipated monetary policy decision tomorrow, gaining the most attention of any such meeting since December.Interbank funding conditions are deteriorating in Spain and analysts are still concerned that a June 17 election in Greece will result in a suspension of bailout funds, yet more and more investors have begun to buzz about support from the world’s central banks.
Opinions about what might happen tomorrow remain highly divided. 48 out of the 60 forecasts compiled by Bloomberg predicted that the ECB would hold rates steady at 1.00 per cent (with the rest predicting a 25 or 50 bps cut). That said, many of those forecasts were made late last week, before G7 central bankers and finance ministers held an emergency conference call supposedly to discuss the crisis.
There are strong economic reasons to believe that a rate cut might be in the works. Inflation is falling closer to the ECB’s under two per cent target, growth of M3 money supply is falling sharply, and manufacturing data just keeps getting worse for most of the euro area.
With this decision still up in the air, here are the actions that the ECB can take tomorrow, and our own BI flash estimates for what the bank is likely to do:
- No rate cut (40%): The ECB has struggled to encourage the leaders of euro area countries to make strong moves towards the political and fiscal union that will ultimately make the region sustainable, however politicians have been slow to respond. Investors reason that the ECB will continue to keep pressure on leaders to do something as the markets will likely tank if the ECB does nothing.
- 25 bps rate cut (59%): Policy easing has been slow to come from the ECB, but conditions are deteriorating so rapidly that the ECB may move sooner to cut rates than it has historically done. What’s more, ECB President Mario Draghi will not want to repeat the mistakes of predecessor Jean-Claude Trichet, who is criticised for keeping too tight a grip on prices even as the crisis escalated.
- 50 bps rate cut (1%): A 50 bps rate cut would be an unprecedented move for a bank that is conservative even by central bank standards. However, if EU leaders are seeing data that we’re not seeing—strong evidence of a bank run in Spain, for instance—it is possible that the ECB could make a stronger move. For these same reasons, such action might startle investors.
- Coordinated central bank action on June 6 (35%) or within a month (60%): Investors consulted by Business Insider are beginning to believe that central banks will band together to expand measures to ease tightening interbank lending conditions. They argue that normal indicators for such measures are not showing the real truth—that certain large banks are coming under major funding stress—and that such pressure will only continue to mount.
- Restart the Securities Markets Programme (50%): The ECB had been purchasing Spanish and Italian sovereign bonds in an attempt to keep borrowing costs down, and leaders from both countries have been pressuring the ECB to restart the program.
- Offer another long-term refinancing operation, probably for greater than 3 years (5%): Two 3-year LTROs restored market confidence from January through March by allowing banks to borrow unlimited funding cheaply from the ECB. Investors speculate that such a move would likely be much less effective this time around.
We’ll find out what the ECB will decide at 7:45 AM ET, and we could hear about non-standard measures (LTRO, SMP, or coordinated action) when Mario Draghi speaks at 8:30 AM ET.
Our “BI Flash Estimates” are not based on models, merely our assessment of analyst and investor ideas based on research and reporting. Therefore, we encourage you to take them with a grain of salt.