ECB: No Policy Changes, Predictable Thought Process

April 4, 2012

The ECB Governing Council left its 1.0% refinancing rate, 0.25% deposit rate, and 1.75% marginal lending rates unchanged as analysts were expecting.

President Draghi’s introductory statement contained no notable surprises.  While CPI inflation is likely to remain above 2.0% in 2012 because of elevated energy costs and higher indirect taxes, medium-term price expectations remained anchored and consistent with the Bank’s notion of price stability, and CPI inflation is projected to “fall below 2% again in early 2013.”  Growth was negative in late 2011 but has stabilized at low levels.  Balance sheet adjustments, high joblessness, and debt market tensions will continue to dampen economic activity, limiting the recovery to a “moderate” and “subdued” pace.  Growth risks are still seen skewed to the downside, while price risks are considered “broadly balanced.”  The ECB’s cross-checking monetary analysis, as before, confirms the conclusions of the economic analysis.  Non-standard monetary measures are “temporary in nature.”

In Q&A, Draghi affirmed that

  • It’s too early to speak seriously of an exit strategy.
  • The growth impact of the second LTRO cannot yet be assessed.
  • No sign has been detected that banks are overly addicted to ECB liquidity.
  • Structural reforms from euro area governments are essential for long-term sustainable growth.  The LTROs only provide a temporary window to get this done.
  • In assessing pass-through effects on labor costs, it’s important to consider productivity as well as wage awards.
  • Growth can be derived from negative short-term interest rates and core member demand.
  • The social models of many European economies have become unsustainable.

Draghi again avoided comments on specific countries and labor contracts.  The final paragraph of his statement reminds us that “the single monetary policy naturally focuses on maintaining medium-term price stability for the euro area as a whole.”

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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