ECB’s Thursday Statement

November 3, 2010

ECB policymakers have fallen into the habit of holding off newsworthy policy revelations to their press conferences in March, June, September, and December when new forecasts are prepared, so this month’s statement doesn’t seem likely to break new ground.  Where possible, President Jean-Claude Trichet can afford to accentuate positive things.

  • Purchasing manager survey results, national surveys such as from the German IFO Institute and the latest economic, business and consumer sentiment readings exhibit a resilience that suggests that growth didn’t slow as much as officials had assumed in either 3Q or 4Q.
  • Money and credit growth has stabilized and no longer is deteriorating.
  • Trichet is under pressure from some Governing Council members, notably Axel Weber of the Bundesbank, to think less dovishly.  Weber continues to be critical of the decision for the ECB to buy peripheral member bonds.  Such purchases have diminished considerably.
  • Although the euro has appreciated, the statement is unlikely to back away from its previous view that price risks “are slightly tilted to the upside.”  Growth seems a little better than assumed, and commodity prices continue to elevate.  The need to cut fiscal deficits may boost indirect taxation, and wages show more life.  The flash consumer price inflation rate for October was 1.9%, the highest level consistent with the ECB medium-term target and up from 0.9% last February and a trough of minus 0.7% in July 2009.
  • While the Bank of England and Fed address the question of more quantitative easing, the ECB’s eyes have been focused on how and when to cut back on unconventional liquidity support.  Trichet is not expected to commit new information on this issue until the December press conference.  However, the three-month euribor rate, which can be interpreted as writing on the walls, is now at 0.99%, in line with the refinancing rate and up from 0.83% at end-July and 0.61% at the end of last April.

The tone of the ECB statement and press conference on Thursday will strike a contrast with the Fed’s statement later today.  I don’t expect Trichet to complain about euro strength, which helps the ECB keep its refinancing rate at 1.0% long, but he may voice negative sentiment that more hasn’t been done to toughen rules ensuring fiscal discipline.

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

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