The latest efforts of the European Central Bank (ECB) to kickstart economic growth and stave off deflation aren’t expected to have a huge impact by themselves, more important is the signal policymakers are sending.
The ECB cut its various lending rates on June 5, as expected, even taking one of its key rates into negative territory. Additionally, the bank announced a couple of other unexpected policy measures aimed at encouraging credit growth and boosting inflation; and, it suggested that outright asset purchases may follow.
Analysts at the major credit rating agencies suggest that what the bank said with these moves may prove more important than what it did. In a new report, Moody’s Investors Service says that “the economic and credit impact of yesterday’s policy announcement is likely to be minimal”; however, it does see an important message to the markets in its actions.
Indeed, Moody’s says that while the measures announced yesterday “are unlikely to significantly alter the economic or financial outlook for the euro area … their broader significance is that the ECB has demonstrated its commitment to providing different forms of further monetary stimulus, should they be required.”
Fitch Ratings echoes this view, saying that it doesn’t expect that the ECB’s moves will do much to lift inflation, or to improve the flow of credit, but that it does reinforce the belief that “eurozone authorities and policymakers are alive to the continuing risks to the bloc’s long-term recovery and adjustment.”
“The breadth of the ECB’s announcement is notable,” Fitch says. “It includes rate cuts including a move to negative deposit rates, measures to provide banks with cheap funding, and further work on potential asset-backed securities purchases. This may be more effective than announcing measures in isolation.”
“It is through their signalling effect that these measures are likely to have the greatest impact,” notes Marie Diron, senior vice president in Moody’s credit policy unit.