Cyprus deal is ‘no template’ for euro-zone rescues: ECB chief
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — European Central Bank President Mario Draghi on Thursday opened the door to a May rate cut or other action as he acknowledged fears the euro zone is slipping back into a deeper recession.
In an eventful news conference, he also took pains to emphasize a controversial bailout of Cyprus won’t serve as a template for future rescues.
“Our monetary policy stance will remain accommodative for as long as needed,” Draghi told reporters after ECB policy makers, as expected, left the bank’s key lending rate unchanged at 0.75%.
Draghi said there had been “extensive” discussions on rates at Thursday’s meeting, but that the “consensus” had been to leave them unchanged.
Draghi’s remarks “were markedly more dovish, and an interest-rate cut from 0.75% to 0.5% now looks highly likely,” said Howard Archer, chief U.K. and European economist at IHS Global Insight. “Indeed, it was very possible that the ECB could trim interest rates…as soon as at its May policy meeting.”
The euro EURUSD +0.0097% initially tumbled as low as $1.2744 as Draghi spoke, but later rebounded to change hands at $1.2844, virtually unchanged from its level in North American trade late Wednesday.
The euro’s initial drop may have also been influenced by an unexpected rise in weekly U.S. jobless claims, which may have sparked safe-haven buying of the dollar, analysts said.
Draghi also took pains to emphasize that the Cyprus bailout isn't a template for future rescues and washed the ECB’s hands of any involvement in an initial proposal, which was abandoned after failing to pass muster in the Cypriot parliament, that would have imposed a levy on insured as well as uninsured deposits at the country’s banks.
He also repeatedly touted the impact of the ECB’s yet-to-be-utilized bond-buying program, known as OMT, for driving down government bond yields in stressed euro-zone countries such as Spain and Italy and trimming corporate borrowing costs.
Earlier Thursday, the final March composite purchasing managers’ index, or PMI, for the euro zone came in at 46.5, matching a preliminary reading but confirming that private-sector activity across the region contracted at its fastest pace since November.
PMI data are closely watched for clues to gross domestic product.
While first-quarter PMI readings indicate the fall in GDP was likely less severe than the 0.6% contraction seen in the final three months of 2012, “the concern is that the euro-zone downturn shows no signs of ending,” said Chris Williamson, chief economist at Markit, the data firm that compiles the PMIs.
Draghi, in his opening statement, stuck to the ECB’s forecast for a return to growth in the second half of the year, but added the caveat that growth is “subject to downside risks.” He also played down any inflation threat, calling risks to price stability broadly balanced and noting that inflation expectations — a particular ECB bugaboo — remain “firmly anchored.”
Instead, the ECB appears more worried about undershooting its target for inflation of near or just below 2%. The annual inflation rate dropped to 1.7% in March.
