Draghi Insists Government Should Determine On Activation Of OMT

As expected, the October ECB meeting was a non-event. Policymakers decided to leave interest rates unchanged while little surprise was heard from the press conference. President Draghi also stated that there was no discussion about the cutting the policy rates at the meeting, reinforcing our view that the central bank would leave interest rates unchanged till the year end. The press conference was focused on the OMT and Draghi reiterated the ECB would give no view on bond yields. The ECB would also not purchase Irish or Portuguese bonds until they have regained full market access. The president also indicated that activation of the OMT would be determined by the governments. Many viewed his comments as a call for Spain and the Eurogroup to activate an ESM program.

The ECB cautiously lifted its assessment on the economic outlook. While it's mentioned in the statement that economic indicators confirmed 'the continuation of weak economic activity', it said that it's in 'the third quarter of 2012', instead of 'the remaining of 2012. Policymakers showed concerns over the inflationary outlook. The central bank believed that the September HICP (rising to +2.7% y/y from +2.6% in August) was 'higher than expected' and was the result of 'past increases in indirect taxes and euro-denominated energy prices'. It also anticipated that 'on the basis of current futures prices for oil', inflation would 'remain at elevated levels before declining to before 2% again in the course of next year'. We believe the inflation outlook is a key reason for the ECB to not consider more rate cuts in the near-term.

Regarding the OMT, the statement affirmed that this instrument would be a 'fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability' in the Eurozone. Regarding Spain, Draghi indicated that the ECB is ready if needed, but 'now it's really in the hands of governments', suggesting the central bank is waiting for the Spanish government's request for financial assistance. Draghi also commented on Spain's fiscal consolidation progress, praising the countries' 'significant progress' in addressing its problems. Regarding the conditionality issue, he stated that 'there is a tendency to identify conditionality with harsh conditions' and 'conditions don't need to be necessarily punitive'.

Concerning the situation in Greece, the ECB said that it would not take part in any voluntary restructuring of the Greek debt as any ECB rescheduling of the repayments on its Greek bonds to reduce the Greece's burden would not be allowed by the EU law. Yet, he clarified that 'any voluntary restructuring of our holdings would be equivalent – would be monetary financing'.