“What we see now is that the housing market is recovering quicker than the usual tightening cycles have suggested,” Broyer said.
Against that backdrop, most analysts see no reason for the ECB to change the cautious, meeting-by-meeting approach it has taken this year.
“It seems to have worked really well,” said ING global head of macro Carsten Brzeski, adding wryly: “Whether this is because every single market participant was only focused on the [Federal Reserve] and didn’t care about the ECB, or because its communication was so flawless, that I don’t know.”
Some Governing Council members have argued that that approach is consistent with the ECB only taking big decisions when it updates its forecasts for growth and inflation every quarter. However, others argue that the economic deterioration requires bolder action. As such, financial markets will be on the lookout for any signs from President Christine Lagarde on Thursday that the Bank is open to cutting again immediately at next month’s policy meeting in Slovenia.
One for the connoisseurs
Thursday’s cut will be one for the connoisseurs: in addition to cutting the Deposit Facility Rate, which is the effective anchor for the rates that banks charge their customers, the ECB will also tweak the rates on its other official facilities. This will be the first step in a transition to a different way of interacting with the financial system and, by extension, the broader economy.
The ECB said back in March it will make it easier for banks to borrow one-week funds from it, by reducing the gap between the DFR and the so-called Main Refinancing Operation rate to 0.15 percentage point, from half a point today. It will also bring down the rate for emergency overnight loans to only 0.4 points above the DFR, from 0.75 points currently.
The steps are part of a long-term strategy to encourage the market to take a greater role in setting the price of short-term money, after 15 years in which it has effectively dictated conditions by providing a huge excess of liquidity. While the ECB has reduced that overhang significantly in the last year, around €3 trillion in excess funds is still sloshing around the system. The ECB is only slowly whittling this down, anxious to avoid unwittingly triggering shortages of liquidity in the more vulnerable areas of the eurozone system.