ECB Draws Line on Stimulus

June 4, 2009

The ECB Governing Council called key interest rates “appropriate” and left them unchanged including a 1% refinancing rate.  The covered bond purchase plan was not expanded beyond the EUR 60 billion announced a month ago, and it will be conducted from July 2009 to June 2010.  The EUR 5 billion per month pace is small compared to quantitative easing being implemented by other central banks like the Bank of England and Fed, and ECB President Trichet continued to insist that the operations do not constitute quantitative easing.  A statement from the ECB includes a six-sentence paragraph pledging a its commitment to an exit strategy from the present loose policy stance that reabsorbs excess liquidity quickly and firmly anchors medium-term inflation expectations.  The statement claims that medium-term expected inflation has not fallen below target even though negative on-year CPI inflation is likely on a temporary basis in the short term.  Details were provided about what type of covered bonds would be bought.  The standards are not unduly lenient.  For example, they must have an AA or better rating and be eligible for use as collateral.  Trichet would not be drawn into speculative talk about the possibility, timing, and circumstances of raising the EUR 60 billion limit on the bond purchase program.  All decision were taken unanimously.  In short, ECB officials acknowledge that the economy has been very weak and that near-term inflation risk is minimal, but they also observed that substantial monetary and fiscal stimulus ought to be sufficient to promote lessening negative growth for the balance of this year and the resumption of positive growth by mid-2010.  While not ruling out further rate cuts categorically, officials signaled a preference for holding the line and monitoring future economic developments.

New macroeconomic forecasts were unveiled.  The mid-point of projected 2009 growth was revised down to negative 4.6% from minus 2.7% offered in March because of weaker-than-assumed growth in the first quarter.  Likewise, the mid-point of the projected range for growth next year was scaled down to -0.3% from zero.  CPI projections were hardly changed by comparison — to a midpoint of 0.3% in 2009 from 0.4% in the March forecast.  The inflation forecast range of 2010 was kept at 0.6-1.4%, underscoring the views that expected inflation remains stable and deflationary talk is unwarranted.  No complaint about euro strength was made, a development that could result in lower-than-assumed inflation.  Monetary analysis “supports the assessment of moderate inflationary pressure,” but a slowdown in the pace of decline of money and credit growth also argues against the risk of a spiraling descent into deflation.

The table below documents the evolution of the ECB staff’s price and growth range projections, which get revised every three months.  In the latest forecast, risks are called balance for both inflation and growth.

  GDP ’09 GDP ’10 CPI ’09 CPI ’10
06/09 -5.1/-4.1% -1.0/+0.4% +0.1/0.5% +0.6/1.4%
03/09 -3.2/-2.2% -0.7/+0.7% +0.1/0.7% +0.6/1.4%
12/08 -1.0/0.0% +0.5/1.0% +1.1/1.7% +1.5/2.1%
09/08 +0.6/0.8%   +2.3/2.9%  
06/08 +1.0/2.0%   +1.8/3.0%  
03/08 +1.3/2.3%   +1.5/2.7%  
12/07 +1.6/2.6%   +1.2/2.4%  


Observing that Euroland government deficits as a share of GDP are slated to rise from 1.9% in 2008 to 5.3% in 2009 and 6.5% in 2010 and that the collective debt ratio is headed above 80% of GDP by 2010, the statement from the ECB urges as much vigilance behind a fiscal exit strategy and it intends to apply to a monetary exit strategy.  They specifically urge the “full application of the provisions of the Stability and Growth Pact” that calls for deficits not to exceed 3% of GDP except in extenuating circumstances such as those occurring right now.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



One Response to “ECB Draws Line on Stimulus”

  1. This all raises the risk that Trichet and Co. will pull the “green shoots” from their soil before these so-called roots have had a chance to grow, does it not? And there are US dollar risks to contend with as well.

    This is assuming, of course, that there are real green shoots — and not just a few upticks in the data. What do you see shaping up in equity and bond flows? How might the BoE and BoC decisions affect the EZ and the euro?

    Where are the cycle gurus!