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Wednesday 25 April 2018

Daily Market Update: March minutes indicate that the ECB has more room for manoeuvre on interest rates if needed


Simon Barry

Having had the minutes of the latest Fed meeting on Wednesday evening, it was the turn of the ECB yesterday to open its books on its latest policy deliberations. The “account” of the Governing Council’s March meeting showed that there was broad agreement that a further cut in the deposit rate was warranted. However, there was a good deal of discussion about how deep that cut should be and what kind of guidance should be provided about the possibility of future cuts:

“On the one hand, a sharper rate cut could be considered, together with indications that the effective lower bound would have been reached for all practical purposes. On the other hand, the proposed limited rate cut could be judged as appropriate for now, given the current assessment, while it would also not rule out the possibility and prospect of further cuts if warranted by the outlook for price stability”.

Policy rates

Ultimately, most members favoured a 10bps cut but would not rule out future cuts in policy rates, reiterating that policy rates remain part of the toolbox. This is interesting and significant as it represents a more nuanced message than that which markets took from Draghi’s post-meeting update at the time (that further rate cuts were not as likely as previously thought because, apart from the fact that the ECB thinks it might have done enough, the interest rate tool would be de-emphasised in any future policy packages). So the minutes help to clarify that the ECB does consider that it has more (if perhaps modest) room for manoeuvre on the interest rate front and that it is prepared to use it, depending as ever on how the outlook for the euro area economy evolves.


With a range of indicators (including this week’s PMI surveys) pointing to ebbing momentum in the zone’s recovery, the case for yet further easing is beginning to build. This is partly why we think that the single currency is set to come under renewed pressure in the months ahead, notwithstanding its recent gains against the dollar and sterling linked to a surprisingly dovish Fed and Brexit issues respectively. In terms of the most recent price action, the dollar is a bit stronger over the past 24 hours, gaining by about 0.5% against both the euro and the pound, helped by slightly better than expected US jobless claims numbers yesterday. Meanwhile in the UK, the latest unit labour cost figures (a broad gauge of underlying cost pressures) was weaker than expected in Q4 as the annual change eased to 1.3% from a downwardly revised 1.7% in Q3. For reference the average growth in this indicator in the decade prior to the crisis was 2.9%. So there’s nothing here to suggest that the Bank of England will be doing anything other than continuing to wait and see on the interest rate front for the time being, especially as it keeps an especially tight watching brief on Brexit risks.

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