Forex Flash: Reiterating the ECB’s focus – Goldman Sachs

FXstreet.com (Barcelona) - A benign inflation outlook and continued weakness of economic activity create a strong prima facie case for further monetary easing in the Euro area. According to the Economics Research Team at Goldman Sachs, “We continue to expect the ECB to keep its key policy rates on hold at the April Governing Council meeting next week.” The ECB has established a very easy monetary policy stance in the Euro area: market overnight rates are close to zero and the liquidity situation is ample. But, owing to impairments to monetary policy transmission stemming from the current fragmentation of European financial markets, this easy policy stance is not being passed through to the real economy in the periphery, where stimulus is most needed.

In the eyes of the ECB, cutting policy rates in this context is a largely futile exercise, since pass-through to the bank rates facing borrowers in the real economy is so modest. For the ECB, it is better to focus on promoting the reactivation and reintegration of peripheral credit markets, so as to re-establish monetary transmission. “Were markets to reactivate in this way, a large endogenous easing of financial conditions in the periphery would result, as bank credit creation resumed and bank-lending rates in Spain and Italy converged towards the much lower levels now seen only in Germany and France. Such endogenous easing would render policy rate cuts redundant.” they add.