Reflections on the ECB Press Conference
November 3, 2011
ECB President Draghi’s first press conference performance impressed me. His responses were expressed in a comfortable way with authority, self-confidence and strong command of the issues. Draghi thinks very quickly on his feet and knows how to express exactly what he wants to convey and do it very succinctly but not in an especially patronizing way. By design, he clearly sought to convey continuity, credibility and consistency as a new chapter of ECB history begins. The kind of communication failures that occurred during the Duisenberg era (1999-2002) seem extremely unlikely to resume.
The 25-basis point cut of interest rates was framed in a typical ECB way, not as a knee-jerk response to the euro debt crisis or an admission that the two earlier rate increases this year in April or July had been mistakes. Facts have changed that shift the inflation prognosis. While not pre-committing future policy moves, Draghi did foretell a “very likely significant downward revision to forecasts and projections for average real GDP growth in 2012” when the staff releases its next quarterly estimates at the December press conference. Draghi essentially conceded a “mild recession” that may extend into early 2012, which is suggested by recent hard data and survey evidence and has been caused by “a moderation in the pace of global demand and unfavorable effects on overall financing conditions and on confidence resulting from ongoing tensions in a number of euro area sovereign debt markets.” Downside risks associated with this new and gloomy baseline forecast have continue to “intensify.”
The ECB’s single mandate is the delivery of price stability, defined as consumer prices for the whole area rising at a medium-term rate that’s below but close to 2.0%. Base effects already had been pointing to a gradual drop of inflation looking ahead to 2012. Two months ago, ECB officials changed their designation of the risks to the price forecast to “broadly balanced” from tilted to the upside previously. Now, Draghi added that the sharply shifting growth environment is likely to moderate “price, cost and wage pressures in the euro area,” and that proved to be the catalyst for today’s rate cut of 25 basis points, which was decided by unanimous vote of the Governing Council. The cross-check of money and credit trends did not contradict the economic analysis but rather also suggest that notwithstanding today’s move price stability will be delivered during the policy-relevant period. Finally, it was verified that price expectations consistent with the ECB’s definition of stability remain firmly anchored.
Today’s rate reduction leaves the main refinancing rate at 1.25%, the level prevailing this year between April and July but still higher than the level of 1.0% from May 2009 until the April 2011 meeting. Draghi wouldn’t be drawn into why the ECB didn’t cut by 50 basis points or whether more cuts will follow. His introductory text neglects to mention if current rates are considered “appropriate” or to characterize present policy as “accommodative.” The statement has little to say about non-standard measures, contained in a two-sentence paragraph, other than that such are all designed to be temporary, limited, and justified in monetary policy terms so that the basic stance can be transmitted as intended. The ECB separately released details of the new covered bond purchase program unveiled a month ago.
Draghi would not be drawn into acknowledging a lender-of-last-resort role for the ECB. Such is not stated in the treaty. He insisted that national policies related both to fiscal policy and other structural reforms that would boost competitiveness, job creation and growth hold the key to resolving the debt crisis.
My main misgiving is that the ECB did not cut rates more sharply. While unanimous, a move of 25 basis points in the face of a clear-and-present recession that is as likely to be severe as it is mild appears to be a compromise that emerged after discussion. It’s doubtful that everyone on the Governing Council went to the meeting considering a reduction of 25 basis points preferable to a cut of 50 bps or no change at all. A cut of 25 basis points is smaller than the 50-bp initial reduction in October 2008 following the collapse of Lehman Brothers. That first move was followed by refinancing rate cuts of 50 bps in November 2008, 75 bps in December, 50 bps in January 2009, 50 bps in March, and 25 bps in April and May. In retrospect, policy in August 2008 was set too tightly. In the year to July 2009, consumer prices fell 0.7% in the euro area, about 2.5 percentage points below the ECB target. However, prices rose 1.7% in the following year to July 2010, so the downward deviation associated with the Great Recession was short-lived. Over the whole body of ECB work, officials there have done an excellent job of achieving price stability as they define such.
Copyright 2011, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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