ECB Wants to Avoid Rise in Short-Term Rates As Phase-Out of Unconventional Measures Begins

December 3, 2009

ECB President Trichet stressed over and over again that decisions not to do a fourth 12-month refinancing tender, to index the third 12-month refinancing operation, to do no more six-month operations after the one scheduled at end-1Q10 in no way whatsoever are meant to signal any bias change in the bank’s interest rate policy.  He also used more emphatic wording than before in endorsing a preference for a strong dollar.  He of course did not mention intervention per se, and the possibility of doing that especially unilaterally but also jointly with the United States still seems rather low.

The effort to preempt rising short-term rates was conveyed in ways other than candidly denying such an intended purpose.

  • The central bank rate structure was left by unanimous vote unchanged, with a 0.25% deposit rate, 1.0% main refinancing rate, and 1.75% marginal lending rate.  These levels were again deemed “appropriate.”
  • There was not a shift to variable rate tenders, even in the longer-term operations, although decisions on these matters were not unanimous.
  • Fixed rate tenders for the main very short-term operations will continue at least through the end of next quarter and perhaps longer.
  • The baseline forecast continues to call for no more than moderate growth with a high degree of balanced risks.  Several factors now supporting growth are temporary, implicitly suggesting that growth in 1H10 may be weaker and more fragile than what occurred in 2H09.
  • The economic and monetary analyses of the ECB point to subdued inflation in the coming year and suggest a lack of inflationary pressure over the more medium term.
  • The Bank issued quantitative growth and inflation forecasts now through 2011 that back up their verbalized assessment.  GDP growth is centered on 0.8% in 2010 (ironically virtually the same as the first projected estimate issued in December 2008) and 1.2% in 2011.  Inflation will be higher in 2010 than 2009 because of energy base effects.   Moreover, the projected CPI range midpoint in 2010 of 1.3% will still be well below the mandated target of “below but close to 2%.  Most telling, the projected CPI range midpoint in 2011 only firms by a tenth to 1.4%.  When inflation is as far below target as this, it is not only okay but appropriate to implement a policy that promotes a modest acceleration.
  • In any case, the released statement reasserted that “medium to longer-term inflation expectations remain firmly anchored” in line with the target.  For the ECB, that’s the bottom line.  It may be time to start the process of dismantling emergency unconventional actions that depressed rates and quantitatively amplified market liquidity, but it would be definitely premature to raise short-term rates or even begin dropping clues that an increase lies not far away.
  • The augmented indication of discomfort with an overly pricey euro also suggests officials are likely to raise rates later than if the euro were not so elevated.  The first increase in the refinancing rate probably will occur closer to end-2010 than mid-2010, and that doesn’t rule out the possibility of no increase at all during next year.

The evolution of the Bank’s price and growth forecasts, including the new ones are shown below.  Each row corresponds to forecasts made at the date shown in the left-most column.

  GDP ’09 GDP ’10 GDP ’11 CPI ’09 CPI ’10 CPI ’11
12/09 -4.1/-3.9% +0.1/0.5% +0.2/2.2% +0.3% +0.9/1.7% +0.8/2.0%
09/09 -4.4/-3.8% -0.5/+0.9%   +0.2/0.6% +0.8/1.6%  
06/09 -5.1/-4.1% -1.0/+0.4%   +0.1/0.5% +0.6/1.4%  
03/09 -3.2/-2.2% -0.7/+0.7%   +0.1/0.7% +0.6/1.4%  
12/08 -1.0/0.0% +0.5/1.0%   +1.1/1.7% +1.5/2.1%  
09/08 +0.6/0.8%     +2.3/2.9%    
06/08 +1.0/2.0%     +1.8/3.0%    
03/08 +1.3/2.3%     +1.5/2.7%    
12/07 +1.6/2.6%     +1.2/2.4%    

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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