Draghi speaks easy at ECB press conference

Draghi has continued to speak easy at the ECB press conference but a looser tongue is still needed. The weak economy, tame inflation, and tight credit conditions all lie behind the ECB's rate cut thinking. More work clearly needs to be done. The fact that the ECB remains committed to closely monitoring money market conditions shows the propensity for  more action ahead. Another rate cut should not be ruled out, but it is clear the main thrust of policy in future will have to come from further liquidity measures. It is not announced in this round, but extra generous liquidity facilities should be underway in the coming months.

Weak loan dynamics, heightened credit risks and ongoing balance sheet adjustment underline the tight loan conditions which the ECB quickly needs to counteract. The rate cut is a start, but it still smacks of re-arranging deckchairs on the sinking ship, when a much harder effort on the monetary bilge pumps is needed to refloat the Eurozone off the recession rocks.

The ECB's toolbox for remedial action is looking increasingly empty. Soon the debate will start to shift towards unconventional measures and at some stage the ECB will need to start wrestling with its demons over quantitative easing. The direction of the ECB policy debate will not be going down too well with Germany. That was clearly at the root of Merkel's anti-rate cut intimations over the last week. It will be further cause for internal ECB policy ructions. Germany is bound to loose out on a simple count of hands.

If the ECB recognise the negative multiplier effects of Eurozone austerity policies, then it must mean the central bank must re-double its efforts to stimulate recovery via extra monetary means. Over the long term, extra ECB monetisation must mean negative downstream effects on the euro. While euro optimists are maintaining a brave face for the moment, a return to sub-USD1.20 territory is looking increasingly likely as the tables turn towards more ECB policy presciptions later this year. Without more effective stimulus measures, it means the Eurozone must be condemned to deeper and more extended recession, probably spilling over into 2014. The result will be the same for the euro in any case - a return towards sub-USD1.20 territory as the economy sinks deeper.