ECB LOOKS IN NO RUSH ON RATES / THE WALL STREET JOURNAL

Heard on the Street

ECB Looks in No Rush on Rates

By Richard Barley

Feb. 6, 2014 12:54 p.m. ET


Mario Draghi doesn't sound like a man hurrying to cut rates. The European Central Bank on Thursday kept its key rate at 0.25%, disappointing those who had expected that January's estimated inflation of 0.7% would spur fresh monetary stimulus.

Judging by the ECB president's comments, they may be disappointed for some time to come.

True, the ECB didn't rule out further action. Mr. Draghi reiterated that rates would "remain at present or lower levels" for an extended period. 

And he stressed the importance of gathering fresh information on the outlook for inflation. The new ECB staff forecasts in March will include figures for 2016. If inflation is still expected to be significantly undershooting the target of "below, but close to 2%" by then, the pressure to act may be significant. Mr. Draghi noted that inflation at its current low levels could make economic adjustment within the euro zone more difficult if it persisted. The ECB is also keeping a watchful eye on the turmoil in emerging markets.

But many of Mr. Draghi's other comments provided reason to doubt that urgent action is in the cards. In particular, hope about the recovery in the euro-zone economy seems to be trumping the fear of low inflation. Mr. Draghi said that domestic demand was getting stronger, and low inflation was being driven by food and energy prices. Meanwhile, extremely low inflation or falling prices in Spain, Portugal, Ireland and Greece were a "relative price adjustment" rather than evidence of deflation.

Meanwhile, the ECB seems to be hoping that burgeoning activity in the corporate bond market may be making up for lackluster bank lending. Mr. Draghi also suggested the regulatory review being undertaken of banks' balance sheets may be masking underlying improvement in credit trends.

All that poses challenges for the euro and for bond markets. Without ECB action, the euro looks unlikely to fall against the dollar, while German bond prices may be vulnerable. Sure enough, as Mr. Draghi spoke, the euro shot more than a cent higher to just above $1.36, while five-year German yields leapt to 0.62% from 0.55%.

The ECB may yet have its hand forced by a deepening crisis in emerging markets, a sharp downgrade in inflation forecasts, or if the recovery shows signs of faltering. But investors might consider dialing back trades that rely on a rapid ECB reaction.


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