Scott Thiel, BlackRock's Deputy Chief Investment Officer of Fundamental Fixed Income comments on the ECB Monetary Policy Decision:
"The reduction in the main refinancing rate from 1.0% to 0.75% is more symbolic than meaningful but it could be seen as a positive sign from the ECB, that it is encouraged by the agreement made by political leaders at last week's EU summit.
"The reduction in the deposit rate to zero, however, may have a greater impact. Financial institutions will start to question the viability of keeping their cash in a safe haven that returns little or nothing. That in turn will put downward pressure on yields of short maturity, high quality issuers and downward pressure on the euro. In the question and answer session, Draghi emphasised that the lack of lending by banks was caused by factors beyond the ECB's control (such as capital considerations, risk aversion and weak borrowing demand).
"This suggests that the ECB sees little need for further Long Term Refinancing Operations (LTROs) because funding is ample. The EU summit's affirmation of European Stability Mechanism (ESM) secondary bond market purchases effectively takes the pressure off the ECB's use of the Securities Markets Programme (SMP), suggesting that the ECB would not use the SMP again unless conditions worsen materially.
"Overall a mixed meeting for the ECB. The fixed income and currency markets did not expect the outcome as rates rallied and the euro fell sharply. However, the ECB did little to assuage near term pressure in the peripheral bond markets."
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