The European Central Bank did nothing today--but was Mario Draghi laying the foundation for a rate cut this spring?

03/07/2013 6:37 pm EST


Jim Jubak

Founder and Editor,

As expected, the European Central Bank did nothing today. No cut in interest rates.

But as expected the central bank said a lot. Some of it was pretty grim, if expected: the bank cut its projections for economic growth in the euro zone in 2013 and, whoa, 2014. Some of it fell into the stiff upper lip category—governments need to stay the austerity course. And some of it was a reminder that the European Central Bank stands ready to intervene when needed. (Just ignore that pesky journalist from the Financial Times that asked those impertinent questions about whether the bank had actually laid the legal groundwork necessary for that intervention.)

European Central Bank president Mari Draghi started his press conference by confirming that central bank’s board of governors had voted to leave interest rates steady at 0.75%. But his message got a bit muddled from there. Draghi told reporters at bank’s press conference that the bank’s governors had talked about cutting the benchmark interest rate because inflation expectations remain low and there’s evidence that the economic weakness of the end of 2012 has extended into early 2013.

Draghi said the bank still sees a recovery later in 2013—but then he announced that the bank had lowered its projections for economic growth to -01% to -0.9% for 2013 (down from the previous projection of +0.3% to -0.9%.) For 2014 the central bank cut its growth forecast to a range of 0% to 2.0% from the December forecast of 0.2% to 2.2%.

So yes, the bank may see a recovery but it seems further off than before--2014 instead of 2013—and more anemic too.

Is all this a set up for a rate cut from the bank later in 2013? That’s certainly one way to read Draghi’s remarks—and that reading helps explain the bank president’s emphasis on the support that’s in place for any country in distress that’s willing to ask for it.

To me that seems a way to say to the financial markets, yes, the EuroZone recession is looking worse, but don’t worry because the European Central Bank is prepared to step in if bond markets start to drop. We’ll see if that promise is enough to keep the market’s happy as the recession deepens this spring.
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