On Sunday, Benoit Coeure, European Central Bank executive board member, announced that despite recent economic data and elevated levels of inflation, it was not absolutely obvious that an additional rate cut would be necessary as conditions now in place will ultimately restore growth. In a similar vein, Ewald Nowotny, ECB Governing Council Member stated in an internet live chat that he currently sees no need to change interest rates in the euro-area. No doubt, the ECB will have to exercise with caution.
According to JP Morgan, the ECB is no longer minded to cut its main refinancing rate next week, as was earlier speculated. The ECB will not be following the same trend set in July, when officials cut the main refinancing rate to an all time low of 0.75%.
JP Morgan explains why:
Coeure and Nowotny were also both cold to the idea of a negative deposit rate. Coeure said that a detailed analysis would be needed and that it was not obvious that all market segments could function properly with negative rates. In the same spirit, Nowotny noted that a negative deposit rate was possible "theoretically", but that it was neither "desirable" nor "realistic".
By agreeing on the new bond purchase programme, the ECB has clearly become much more aggressive in tackling the sovereign crisis and improving the transmission of its policy stance. But, when it comes to setting the policy stance itself via the main policy interest rates, the comments by Coeure and Nowotny suggest that the ECB's reaction function remains cautious.
Coeure's expectation of a return to growth next year is a reasonable one, says JP Morgan, so it is likely the ECB will hold fire:
The prospect of improving growth also appears to be making the ECB less inclined to dip its toes into negative territory in the near-term. Hence, the likelihood of a 25bp cut of both the refi and deposit rates in December is also falling, unless downside risks materialise. For now, we retain the forecast that the refi and deposit rates will be cut 25bp in December to -0.25% and 0.5%, respectively.