ECB: Decision and Comments Produce No Surprises

July 2, 2009

As universally expected, the rate structure of the European Central Bank was not changed at this month’s meeting: a 1.0% refinancing rate surrounded by a 0.25% deposit rate and a 1.75% marginal lending rate.  President Trichet’s statement stressed predictable points as well.

  • The existing rate structure is appropriate.
  • Sub-zero CPI inflation had been anticipated by officials, will be temporary, and is not a development that requires any further adjustment of monetary policy.
  • The recession will continue for a few more quarters but will be less intense.
  • A return to positive quarterly growth is expected by mid-2010.
  • Growth risks are symmetric.  So are the risks to inflation.
  • Medium-term expected inflation remains firmly anchored and is consistent with the target of below but close to 2%.
  • Money and credit growth dynamics continue to decelerate and corroborate conclusion of the economic analysis that inflationary pressure will stay low.  Financial conditions are improving.  ECB policy support, including the planned 12-month refinancing tender, has not yet fed fully through to the economy.
  • Officials are confident that once the macroeconomic environment improves, monetary stimulus can be unwound quickly, reabsorbing liquidity and preventing any residual threat to medium-term price stability from developing.

The statement did not reference the euro.  In Q&A, Trichet again refused to close the door on the possibility of an additional rate cut, but such remains an unlikely scenario and would require circumstances to develop quite differently than officials are anticipating.  Today’s decision was unanimous.

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



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