Draghi still dovish say analysts

Some analyst feedback to European Central Bank president Mario Draghi's presser:

Christian Schulz, senior economist, Berenberg:

ECB President Draghi noted some further progress in the defragmentation of the Eurozone financial system. For example, interest rates on loans to companies of up to €1m, a proxy for SME financing conditions, have dropped a little further in Spain and Italy, while they have been roughly stable, but 100bp lower, in Germany and France

However, the ECB signalled prominently that it is paying “particular attention” to rising money market yields. Due to banks’ repayments of the 3-year LTROs, excess central bank liquidity has dropped €800bn to €250bn since the beginning of the year. Partly as a consequence, forward money market rates have risen (the 1-year 1-year EONIA forward from 10bp in early May to 55bp in early September). This is a thinly veiled threat that the ECB could ease liquidity conditions again with more LTROs or an explicit extension of the full-allotment regime beyond July 2014. However, Draghi also noted that the slightly tighter conditions were mostly the result of the fading financial tensions and fragmentation.

At the same time, the ECB stands ready to intervene if interest rates reached unwarranted levels, which implicitly signposts that the ECB is not concerned by the current levels yet. Draghi did not say what actions the ECB could take, but a rate cut would be the most likely first step.

When asked about the unanimity of the interest rate decision, Draghi seemed to introduce Fed-style minutes by stealth. He said that some governors had wanted to drop the interest rate discussion altogether given the economic recovery, while several others had observed that this tool should at least remain on the table. If he continues this, we may in the future be able to deduct shifts in the majorities within the Governing Council. This may well be how far minutes will eventually go, when the ECB discusses them in October. Attributing votes to individual members seems to be the red line for European central bankers.

Ishaq Siddiqi, market strategist, ETX Capital:

The central bank kept policies unchanged as expected and chief Mario Draghi sounded off a broadly expected dovish tone but adjusted GDP projections higher, again very much expected by the market. He said little fresh, acknowledged that liquidity conditions are better, offered little detail on forward guidance thresholds.

The only surprise is that he said a rate cut was discussed but the Governing Council were against it. So in response, the euro fell to its lowest level against the USD since July 22, hovering above $1.31.