ECB: No Fresh Policy Initiatives This Month

November 8, 2012

As most analysts expected, the Governing Council of the European Central Bank left its three key rates unchanged for the fourth meeting in a row.  In July, the refinancing rate, deposit rate, and marginal lending rate were reduced by 25 basis points each to their current levels of 0.75%, 0.0%, and 1.5%.

Pdt Draghi’s written statement predicted continuing “weak” momentum in growth largely because of ongoing balance sheet adjustments but also the uneven global recovery.  Growth risks are skewed to the downside.  The inflation forecast is sanguine.  Above-target inflation this year due to commodity pressures and administered price hikes will give way to a fall back to sub-2.0% readings in 2013.  Expected inflation remains firmly anchored and in line with the ECB medium-term target, and price stability in the medium term is also indicated by subdued loan and money growth dynamics.  Risks to the inflation forecast are broadly balanced.

There was nothing to add regarding the OMT program.  The ECB has outlined the conditions for activating unlimited bond buying.  The OMT is intended to eliminate extreme circumstances and underscore the irreversibility of the euro.  The program was a response to the increasing segmentation of financial conditions within the euro area, a sign that the transmission of monetary policy wasn’t happening in an even way.  It is up to the peripheral governments, not the ECB, to meet the OMT requirements and whether the facility is ever in fact used.  No new LTRO or other non-standard instrument was announced at this time. 

In the press conference, Draghi asserted that policy was already very accommodative and had been made much more so through a series of actions taken in the past year since he’s been ECB president.  He wouldn’t preannounce further easing but didn’t refute that officials are closely monitoring economic prospects and are prepared to adjust policy again if needed in the future. Markets are already pricing in some possibility of a rate cut or some other easing gesture next month when new staffing forecasts are prepared. Draghi expressed satisfaction that some LTRO money will be paid back soon and noted that fears of accelerated inflation from the LTROs didn’t occur in the interim.

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

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