Draghi ‘very unlikely’ to cut interest rates or boost SME lending

The ECB president Mario Draghi is highly unlikely to cut the interest rate or announce a big bazooka for SME lending at tomorrow’s monthly meeting, according to senior economist with Brussels-based ING, Carsten Brzeski.

“The question is whether the ECB is willing to give as explicit forward-guidance as the Fed by, for example, quantifying targets (or target zones) for unemployment and inflation.

“We don’t think so. In our view, Draghi will try to give ECB-style guidance on the fragility of the recovery, on full allotment until the summer of 2014, and on the ECB’s determination to do more if need be. This should push any exit speculation into the distant future,” said Mr Brzeski.

Economic growth across the eurozone remains very weak, despite the ECB lowering the main interest rate to an historically low 0.5%.

Mr Draghi has highlighted the fragmented banking system in the region. Banks, particularly in the periphery, including Ireland’s, continue to struggle with bad debts, which is putting a block on the transmission of credit.

Slightly better-than-expected manufacturing output data and a slight pick up in sentiment indicators since the last ECB monthly meeting will be cited as evidence that a rate cut is not needed over the near term, said Mr Brzseski.

Credit to the SME sector across the eurozone remains severely constrained. Moreover, it is set to remain constrained as banks continue to deleverage and increase capital ratios to meet the new Basel III regulations by 2019.

There has been speculation over the past few months that Mr Draghi would try to unleash a big bazooka that would spur lending to SMEs. This included the possibility of the ECB developing a securitisation market for SMEs. But the ECB head cautioned against mounting expectations in this area at the June meeting.

“In our view, Draghi will try to send two verbal messages to market participants: do not be afraid of any looming ECB exit from loose monetary policy; and have full trust in the ECB’s outright monetary transactions programme,” said Mr Brzeski.

“In our view, the ECB remains in crisis mode. The eurozone economy is still lagging far behind the US economy and exit discussions at a moment in which the economy is showing that signs of a bottoming out are more than premature.

“In fact, chances of an additional rate cut if the economy fails to recover are still much higher than any imminent end to loose monetary policy.”