A Boring ECB Statement and Press Conference

August 5, 2010

The ECB Governing Council retained its interest rate structure: a 1.0% refinancing rate flanked by a 0.25% deposit rate and a 1.75% marginal lending rate.  This rate structure has been in place for 15 months thus far.  Today’s do-nothing decision was universally expected.  It will be a long time before the currently “appropriate” stance gets chance.  “Inflationary pressures over the medium term remain contained,” and “moderate and still uneven” growth is expected “in an environment of uncertainty” continues to be expected by officials despite signs of quicker economic growth in 2Q10 and better-than-anticipated third-quarter activity indications thus far.  German earlier today released data showing that industrial orders leaped by a further 3.2% in June and was 28.4% greater than in June 2009.  Domestic orders for capital goods, a portent of future capital investment in Germany, soared 20.9% annualized in the spring quarter on top of a 34.3% annualized advance in the first quarter.

Even by ECB standards, today’s formal introductory statement from ECB President Trichet changes very little from what was released four weeks ago.  Whole paragraphs are repeated verbatim.  All the key phrases are repeated, such as “inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term,” and there are no conspicuous omissions.

Against critics of the CEBS stress tests on European banks, Trichet defended the testing as “comprehensive and rigorous” and maintained that it confirmed the “resilience of the EU and euro area banking systems as a whole” and that the exercise had constructively “enhanced transparency” of the risk exposures of the 91 financial institutions participating in the exercise.

The ECB refinancing rate was reduced during the 2008-9 recession by 325 basis points in total compared to cumulative drops of 450 bps in the Bank of England Bank Rate, 500 bps in the federal funds target, and 40 bps in the Bank of Japan overnight money rate target.  From a cyclical high of 4.25%, the refinancing rate was cut by 50 basis points in October 2008, 50 bps in November, 75 bps in December, 50 bps in January, 50 bps in March, and 25 bps each in April and May of 2009.

In the question-and-answer portion of the press conference, Trichet

  • Did not comment on the recent appreciation of the euro, refusing to be drawn into a request over whether such might impede recovery.
  • Indicated satisfaction that the need for the central to buy sovereign bonds had diminished greatly but left no clue about where that bond purchase program, which was begun in May at the height of the sovereign debt crisis, goes from here.

The September 2 press conference should be a more interesting event.  Summer will have ended, more time will have passed to assess the post-stress test performance of the markets, and officials will be releasing new price and growth forecasts.  The intervening four weeks ahead have the heaviest concentration of seasonal vacationing in Continental Europe.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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