ECB Press Conference Reviewed

June 6, 2013

By consensus, members of the 23-person ECB Governing Council concluded today that conditions had not changed sufficiently in a one-directional way since their May easing to grant further action now, so the refinancing rate, deposit rate, and marginal lending rate were left respectively at 0.5%, 0.0%, and 1.0%.  A statement hinted officials, nonetheless, will maintain an ease bias by keeping the monetary policy stance “accommodative for as long as necessary” and to “monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.” This was the same language used in May when the refi and MLR were cut by 25 and 50 bps, respectively.

The Governing Council did not abandon its view that gradual economic recovery will commence some undefined time in the second half of this year even though activity hadn’t yet even stabilized, this being June with a recession in its seventh consecutive quarter.  The upturn is to be powered by exports, the accommodative monetary policy and higher real incomes because of lower inflation.  Balance sheet adjustments remain a big drag, and risks to the growth forecast are skewed to the downside.  Risks to the inflation forecast, by comparison, are “broadly balanced” around a baseline view that predicts “subdued” underlying price pressure throughout the time horizon with inflation expectations firmly anchored and consistent with the central bank’s target.

Newly released macroeconomic forecasts from the ECB are compared in the table below with previous forecasts that are issued quarterly.  Projected 2013 growth has been revised lower this time to a range midpoint of minus 0.6%.  In June 2012, the forecast for 2013 was a GDP dip of just 0.1%.  Projected inflation in 2013 and 2014 are now centered around 1.4% and 1.3%, respectively, each of which is lower than the target of “below but close to 2.0%.”

  GDP 2013 GDP 2014 CPI 2013 CPI 2014
06/13 -1.0%/-0.2% 0.0%/2.2% +1.3%/1.5% +0.7%/1.9%
03/13 -0.9%/-0.1% 0.0%/2.0% +1.2%/2.1% +0.6%/2.0%
12/12 -0.9%/0.3% +0.2/2.2% +1.1%/2.1% +0.6%/2.2%
09/12 -0.4%/1.4%   +1.3%/2.5%  
06/12 0.0%/2.0%   +1.0%/2.2%  
03/12 0.0%/2.2%   +0.9%/2.3%  
12/11 +0.3/2.3%   +0.8%/2.2%  


President Draghi stressed that the ECB has a number of stimulus options including a negative deposit rate or some kind of more explicit data-related policy guidance that could be utilized and might be used if conditions later warrant.  He vehemently rejected the assertion that ECB policy had exacerbated market volatility and strongly defended the results of earlier policy initiative.  He endorsed efforts to establish a banking union and reaffirmed the need for governments to correct excessive fiscal deficits and to balance such an initiative with structural reforms that would enhance competitiveness.

A key concern of monetary officials are the very subdued monetary and credit dynamics, particularly the annual negative growth of loans to non-financial corporations, which lengthened to minus 1.9% in April from -1.3% in March and the anemic lending to households, just 0.3% above a year ago.  Another expressed dismay in the published statement was “weak labor market conditions.”  Survey evidence like indications of sentiment and the PMIs have brightened a bit.  Whether they continue to do so and credit and labor market data in coming months seemingly hold the key to what the ECB does over the summer and in early autumn.  The euro does not appear to be front and center in the policy debate.  It’s been comparatively stable against the dollar.  In the past, some frustration with Japan’s handling of the yen has been insinuated.

The easing in May was the first interest rate cut since July 2012.  Prior easings were done in November and December of 2011.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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