ECB Officials Hold Their Line

May 8, 2008

After not changing rates, which came as no surprise, ECB officials made next to no modification to their verbalized policy stance. The formal written statement presented at today’s off-site press conference in Athens reads even more closely to the April statement than is typical in a typical two-month sequence. Medium-term price risks remain upwardly skewed from a forecast that anticipates only a very gradual decline in significantly above-target inflation. In Q&A, Trichet dismissed the significance of a drop in CPI inflation to 3.3% in April from 3.6% in March, noting that such figures bounce around. One of the very few changes in the statement was the addition of “the risk of second-round effects owing to the high level of current inflation rates” to high capacity usage and tight labor market conditions as factors that could result in higher-than-expected wage growth. That extra emphasis, albeit somewhat redundant, indicates that fear of second-order inflation is mounting among officials.

Officials did not change their discussion of economic conditions and growth prospects. More moderate, but ongoing positive growth, is projected, and that is exactly what is needed for an economy emerging from a span of above-trend growth with significantly above-target CPI inflation at present. Growth will be driven by all cylinders of private demand: exports, investment, and consumption. Trichet in Q&A would not be drawn into speculating how next month’s scheduled new quarterly forecasts from the ECB staff might deviate from those released in March but underscored that the Governing Council does not underwrite any forecasts, even from its own staff. They are forecasts, not guidelines or targets. Industrial output was called resilient, and the PMI-services index in April was better than officials anticipated.

The discussion of money and credit growth was left unchanged, too. While distorted to some extent, the gestalt of those data represents a medium-term upside challenge to price stability and discredits the view of some that market turbulence has made credit scarce in Europe.

In sum, the press conference did not take on a discernibly more dovish tone, which was how I expected it to go.

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