Divyang Shah, Senior IFR Strategist
The German press (Spiegel) informs us that there was a North/South split at the ECB when it came to cutting rates with 7 members (including Weidmann and Asmussen) against a cut.
Remember that these seven members are still in a minority and while the German voices are significant this still does not explain why they were not outvoted on a standard measure especially when they had in the past been outvoted on non-standard measures — recall the resignations of Weber and then Stark.
While there is certainly a bias toward delivering further monetary easing it seems that there is a consensus to keep the firepower in reserve should things worsen.
This would come in handy should the Fed miscalculate on its exit and risk markets were more addicted to cheap money than had been assumed. The news on a split seems to be designed to help the ECB support its asymmetric forward guidance where all interest rates to “remain at present or lower levels for an extended period of time”.
The “or lower” part of the statement requires the ECB to provide support with possible action as opposed to just words. Whether this is sufficient remains uncertain especially as significant flattening of the money market curve faces the difficulty of pricing in the reduction in excess liquidity.
For now the ECB’s focus is on providing little clarity on what “extended period” means and focusing instead on making sure that the “or lower” part of the forward guidance message gets through.
