While the European Central Bank left interest rates unchanged, the euro received a lift from ECB President Draghi's steadfast defense of the euro and OMT, reassurance of significant progress in Spain and Portugal, and assessment that inflation is higher than expected. Do not be mistaken, the ECB is still very dovish but going into the monetary policy meeting, a small subset of investors and economists expected a rate cut but Draghi made it clear that they did not even discuss this possibility.
It shouldn't surprise anyone that Mario Draghi had nothing new to say in today's monetary policy meeting. Having only announced Outright Monetary Transactions (OMT) last month, the ECB is in no rush to ease again and Draghi made it very clear that a rate cut is not even on the table. The ECB President chose instead to spend the majority of his time defending OMT, which he says is a "fully effective backstop." In other words, the ECB believes all they need right now to properly contain sovereign risk is OMT. However we all know that OMT cannot be activated until all the conditions are in place, which includes a formal request for help from Spain or Portugal.
It also sounded like Draghi tried to sweet talk Spain and Portugal into taping the central bank. The ECB President said the "conditions don't necessarily need to be punitive" and the amount of measures passed by Spain are remarkable. In the same breath, he added that Portugal is an example of the significant progress that can be made. One of the main reasons why Spain and Portugal have been hesitant about seeking aid is the fear that they will be asked to implement more restrictive austerity programs and the ECB is doing is trying to tell Spain and Italy today that may not be the case - which we find hard to believe.
Nonetheless, their subtle coaxing has been received positively by the market and taken the focus off of the central bank's concerns about the outlook for the Eurozone economy. Mario Draghi began his press conference talking about how the euro area economy is expected to remain weak in the near term and will only recovery gradually. Disappointing economic data and heightened uncertainty leaves the risks are to the downside. While inflation is higher than expected, those risks are broadly balanced.
It is also worth noting that Draghi implied that the ECB does not intend to restructure Greek bonds because it would represent monetary financing. This has led many to believe that the ECB may not live up to their promise that bond purchases under OMT will be pari passu, or on equal footing with other bondholders.
At the end of the day, regardless of ECB President's Draghi's attempt to defend OMT, it is clear that this program has failed to remove sovereign risk and generate momentum in the markets. If financial market conditions deteriorate, the European Central Bank still more tools at their disposal. For example, the ECB could cut interest rates or introduce another round of Long Term Refinancing Options. Neither of these measures are needed right now but if bond yields in Europe soar again, the central bank could reach into their toolbox.