ECB Preview

June 5, 2012

The June meeting of the ECB Governing Council is being held on Wednesday rather than the customary Thursday.  This is an important meeting, coming a day after Group of Seven finance ministers are holding an impromptu discussion about how to defuse the latest turn for the worse in Europe’s banking and debt crisis and amid mounting evidence of an intensifying recession in the region.  There is speculation that the Governing Council might sanction a cut of its 1.0% refinancing rate or introduce more aggressive non-standard measures.  New macroeconomic forecasts are due.  The evolution of such are outlined in the table below.

  GDP 2011 GDP 2012 GDP 2013 CPI 2011 CPI 2012 CPI 2013
03/12   -0.5%/+0.3% 0.0%/2.2%   +2.1%/2.7% +0.9%/2.3%
12/11 +1.5/1.7% -0.4/+1.0% +0.3/2.3% +2.6/2.8% +1.5/2.5% +0.8/2.2%
09/11 +1.4/1.8% +0.4/2.2%   +2.5/2.7% +1.2/2.2%  
06/11 +1.5/2.3% +0.6/2.8%   +2.5/2.7% +1.1/2.3%  
03/11 +1.3/2.1% +0.8/2.8%   +2.0/2.6% +1.0/2.4%  
12/10 +0.7/2.1% +0.6/2.8%   +1.3/2.3% +0.7/2.3%  
09/10 +0.5/2.3%     +1.2/2.2%    
06/10 +0.2/2.2%     +0.2/2.2%    
03/10 +0.5/2.5%     +0.9/2.1%    
12/09 +0.2/2.2%     +0.8/2.0%    

 

When supporting banks and economic growth, ECB officials like to act more dovishly than their rhetoric implies.  Recent signals have been sent that the governments need to lead and that the central bank is near the limit of what it can do to help.  It would not be surprising to see the ECB offer less than market players are hoping to get.  While negative growth has returned in 2Q12 and at greater intensity than seen in the final quarter of 2011, a 0.1% uptick of annualized GDP in !Q was better than private analysts and ECB staffers were expecting.  Inflation is also a touch lower but probably not enough to persuade officials to say that price risks are skewed to the downside rather than evenly balanced.

Regarding their interest rates, officials have three options: 1) do nothing, 2) do nothing but include language that strongly hints of a cut in July, or 3) cut now.

Regarding unconventional monetary measures, a decision has to be made regarding the 3-month LTROs, and such will likely be extended through at least the end of 2012.  The sense one gets is that officials would rather see what the politicians do before introducing new measures, and political action to a great extent is being constrained by rebellious voters.  Greek and French parliamentary elections occur at mid-month and will be followed later in June by an EU summit.

Although the ECB meeting is on a different day of the week than usual, the announcement and ensuing press conference are at the usual times, respectively 11:45 GMT and 12:30 GMT.

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

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