The European Central Bank lowered its interest rates on Wednesday and extended its liquidity provisions, demonstrating that it is “willing to go far when acting within its core mandate,” RBC Capital Markets wrote in its weekly research paper, “Global Directions,” on Friday.
RBC expects European rates to be cut 50 basis points in the next few months, according to the paper.
The ECB also demonstrated a reluctance to increase sovereign bond purchases, according to RBC. Analysts expect that any step-up the ECB does take will be a “modest increase in scale and ambition,” rather than a full-blown asset purchase.
“From a market perspective, the push toward a closer fiscal union and economic convergence of the euro area, alongside the necessary EU treaty changes, were certainly seen as steps in the right direction,” according to RBC. However, it’s unlikely that the EU summit held Dec. 9 will result in a real solution to the euro crisis area, the report continues: “Even if the 27 EU leaders (or even only the 17 EMU members) could find a common denominator for an agreement, markets would want to take a close look at the details and especially what they would mean for the ECB.”
While structural reform and fiscal consolidation are long-term projects, they are “the absolute crucial foundation for any improvement of the credit perception of euro area sovereigns,” analysts wrote.
One of the ECB’s key objectives is to retain primary market access for Italy and Spain, the main tool for which will be a “leveragedup EFSF,” according to RBC.