ECB Press Conference: Upwardly Revised Growth and Price Forecasts But Low Interest Rates to Continue

September 3, 2009

The ECB rate structure will remain unchanged.  The key refinancing rate stays at 1.0% and continues to be surrounded by a deposit rate of 0.25% and a marginal lending rate of 1.75%.  A second unlimited 12-month allotment of liquidity on September 30th will be made at the 1.0% refinancing rate, a signal of no urgency to begin raising that rate.  And yet, ECB officials are slightly more upbeat and have revised projected 2009 and 2010 growth and inflation slightly upward.  Officials update staff forecasts on a quarterly basis but caution that such estimates must not be construed as targets but rather working assumptions.  The evolution of the ECB’s forecasts is shown below, where the left-most date refers to when each forecast was made.  The mid-point of the projected GDP growth range for 2009 is a half percentage point higher but still very negative at -4.1%, while projected 2010 growth is centered above zero for the first time since forecasts released in December 2008.  Projected CPI inflation never did show a negative calendar year figure and has been raised by a tenth for this year and by two tenths in the case of  2010.

  GDP ’09 GDP ’10 CPI ’09 CPI ’10
09/09 -4.4/-3.8% -0.5/+0.9% +0.2/0.6% +0.8/1.6%
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%  


The most striking feature of the above table is the fallibility of macro-economic forecasting upon which policy is based and justified.  The ECB tightened its stance as recently as July 2008, raising the refinancing rate then by 25 basis points to 4.25% even though projected 2009 growth was merely +1.5% at the time of that action.  ECB authorities pride themselves in conducting a forward-looking policy yet failed to see the Great Recession coming even eleven months after the initial tremor in global financial markets.  That blind spot illustrates the difficulties of running policy in times of high uncertainty.  The bank’s policy cross-check from an intensive monetary analysis is supposed to spot shifting price and growth trends a year or more in advance but did not in this particular instance.  In the year to July 2008, when the ECB tightened, M3 expanded 9.3%, twice as much as officials consider appropriate, and credit to the private sector advanced by a rapid 11.1%.  Indeed, today’s statement from the ECB Governing Council reassuringly asserts that “annual growth rates of M3 and loans to the private sector [of] 3.0% and 0.6%…. support the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term.”  The problem is that the level of M3 in May-July 2009 was still 100.8% greater than ten years earlier, an annualize gain of 7.2% over an entire decade, and that represents an overshoot of 2.7% per annum from the pace ECB officials believe to be consistent with long-term price stability.  Their own framework seems out of whack with actual macroeconomic results.  Shifts in money and credit growth trends can provide a useful guide for knowing when to shift policy, as the ECB did in December 2005.  Beyond that, the data tend to show many things and can be construed anytime to justify whatever policy officials want to run based on other criteria.

Today’s statement did not repeat the phrase from that financial markets are “still strained.”  Officials did reiterate several points made before in recent months.

  • Officials claim that expected inflation remains consistent with the central banks definition of price stability (that is, CPI inflation below but close to 2.0%).  Since expected inflation is hard to measure,this unproven assertion is tantamount to saying that ECB policy remains as credible as it ever was.
  • The swing of actual inflation to sub-zero readings was exaggerated by base effects related to energy, and will not persist through the rest of 2009.
  • The brunt of the recession is over.  A stabilizing stage has progressed further since last month’s policy meeting.
  • Stabilization will evolve into recovery, with boosts from the inventory cycle, monetary and fiscal stimulus, and measures to restore financial market functionality.
  • But recovery will be gradual, uneven (the one admission of widening disparities among the 16 euro-sharing countries), and subject to high uncertainty.  Growth will be mitigated by the limited nature of some of its impulses and by ongoing balance sheet corrections.
  • Inflation will remain subdued into the medium term because of sluggish aggregate demand and slack labor and capital usage.
  • The present policy stance is appropriate.
  • Officials will not betray the public trust to safeguard the stability of money.  They again promise to unwind stimulus “in a timely fashion” and to reabsorb excess liquidity “to counter effectively any threat to price stability over the medium to longer term.”  However, this process will begin only “once the macroeconomic environment improves.”  Well, such already has started to happen.  This is another judgement call.  Officials are retaining considerable flexibility over the timing of future tightening.  The best clue is the 1.0% rate on coming the 12-month to September 2010 refinancing tender, which implies no rate increase in what remains of 2009 or very early 2010.
  • Perceived risks associated with the new growth and inflation forecasts are considered “broadly balanced.”  An added positive risk factor is stronger export demand than projected, while unfavorable labor market conditions were no longer singled out as a potential negative growth risk factor.

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



Comments are closed.