ECB Meeting Preview: No Meaningful Policy Changes
January 12, 2011
During this prolonged span of ultra-low interest rates, the Governing Council of the European Central Bank has preferred to introduce initiatives and pertinent information at its March, June, September, and December meetings. Those are the months when new staff projections are unveiled. Officials will find no compelling reason to break this pattern. This is unlikely to be a ground-breaking news conference.
The interest rate structure of a 1.0% refinancing rate flanked by a 0.25% deposit rate and a 1.75% marginal lending rate has survived intact since May 2009 and will not be changed Thursday. The ECB’s announcement will be flashed Thursday at 12:45 GMT, and a press conference will start 45 minutes later. These levels will again be called “appropriate.” These rates convey a very accommodative stance, conforming to the euro area’s macroeconomic circumstances. Last month, ECB officials projected growth of 0.7-2.1% this year followed by 0.6-2.8% in 2012, with CPI inflation of 1.3-2.3% this year and 0.7-2.3% next year. While total CPI inflation of 2.2% in December exceeded the 2.0% target for the first time since November 2008, core inflation continues to hover near 1.0%, and ECB officials in December revised the risk assessment on their inflation forecast to balanced from tilted slightly upward. Money and credit growth have picked up but remain very low, reinforcing the view that inflation is unlikely to become excessive next year. On-year growth in labor costs slowed to 0.8% in 3Q10 from 1.6% in 2Q and 2.0% in the first quarter of last year. The jobless rate of 10.1% hasn’t begun to abate.
Economic data released in the six weeks since the last ECB meeting have been mixed. Industrial production rose 1.2% in November on top of a 0.7% increase in October, and output in those two months was 1.3% greater than the 3Q level. Orders advanced 1.4% in October. Economic sentiment held up much better than officials were expecting during the second half of 2010, printing at 106.2 in December compared to quarterly average readings of 105.0 in 4Q and 102.2 in 3Q. Retail sales failed to post an increase in August, September, October or November, dropping 0.8% in real terms in the most recent of those months. But the retail purchasing managers index in December of 52.9 was at a 31-month high. The manufacturing PMI scored a 57.1 in December, best since April, and that was sufficiently better to keep the composite PMI at 55.5, same as in November despite softer growth in services and some EMU members that are in danger of stalling. Indications of investor sentiment like the ZEW index and the Sentix gauge were better in their latest reports. The Conference Board’s index of leading economic indicators for Euroland improved 0.7% in November after a 0.3% uptick in October. Construction has been soft to be sure, but severe weather had much to do with that. Calendar day-adjusted German GDP advanced 3.5% last year, fastest since 2000 when such also went up 3.5%.
The 800 pound gorilla in the room is the sovereign debt crisis, and that will be the subject of much of the Q&A portion of Thursday’s press conference. Bond premiums among the peripheral members relative to Germany are somewhat wider than when the ECB met in early December in spite of stepped up buying by the ECB in December and this month. The so-called SMP — which Trichet continues to call ongoing — plus other unconventional measures such as the 1-month, one-week, and three-month refi operations are treated as separate from basic monetary policy, intended only to facilitate the proper transmission of the Bank’s monetary policy. Trichet will not miss an opportunity to stress the firewall between monetary policy and these other liquidity-enhancing programs, which are temporary by design and sterilized by other bank operations. The point has indeed been made that the first refinancing rate increase might occur before all non-standard operations are ended. Some of the long-term refinancing operations may be ended after this quarter, but an announcement on such will not be made before March. A rate hike remains reasonably distant.
I expect no modification in Trichet’s 110% endorsement of European monetary union and mocking reaction for anyone talking about future defections from common currency usage. But as in December, it will be stressed that European economic union has not been achieved as pledged when monetary union occurred in 1999, and that must be done by the governments. The acronym EMU stands for Economic and Monetary Union, but a virtual single fiscal policy is a goal that failed thus far. What Trichet hasn’t done is lay out a recipe for how, without the tool of currency devaluation, the peripheral economies are to recover the competitiveness they need to cut their fiscal imbalances to EMU norms permanently.
I don’t think the central bank president will seize on the above-target 2.2% rate of CPI inflation as a pretext to hint at any greater likelihood of a need to raise the refinancing rate sooner rather than later. Just the opposite signal was conveyed at the December meeting, and no central banker wants to undertake a double-reverse in policy signals in back-to-back meetings.
The euro was at $1.3172 at the time of the last policy meeting, got as weak as $1.2873 this past Monday but has trimmed its net loss to 0.3% over these six weeks. However, the common currency remains 1.7% lower on balance against the pound and yen and is 3.2% weaker against the Swiss franc.
Copyright Larry Greenberg 2011. All rights reserved. No secondary distribution without express permission.
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