ECB Press Conference Review: Nothing Very Illuminating

October 8, 2009

After holding an off-site meeting in Venice, the ECB Governing Council left its key interest rates unchanged, with a 1.0% refinancing rate surrounded by a deposit rate of 0.25% and a marginal lending rate of 1.75%.  Those levels have been in place since May 7.  From exactly a year ago to the final cut of 25 basis points in early May, the ECB had previously reduced the refinancing rate in seven moves by a total of 325 basis points from a peak level of 4.25%.  The statement released by officials broke no new ground on the outlooks for growth and inflation, the thinking behind those views or, most importantly, what bank officials have been saying about 1) the strong euro and weak dollar and 2) an exit strategy from the present ultra-accommodative monetary stance.  In response, the euro firmed as high as $1.4801 but settled back to $1.4745 at present, which is a little softer than its level 2-1/4 hours ago.

Trichet repeated that excessive foreign exchange volatility can damage economic performance and reiterated too that the affirmed goal of a strong dollar expressed by U.S. officials is extremely important, that is constructive.  He refused to talk about intervention before the fact other than to say that markets will be told about such only when officials have something to say, that is after having actually intervened.  None of these comments was different from other recent remarks.  In the past, when Trichet wanted to issue an extreme protest, he called FX developments “brutal.”

Today’s statement repeats a paragraph from September’s statement that promises to “make sure that the measures taken are unwound in a timely fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term once the macroeconomic environment improves.”  That’s too vague a promise to be meaningful.  Timing is entirely contingent, and the amount of improvement required is not quantified even roughly.  Negative economic growth of 0.2% last quarter after declines of 2.5% in 1Q and 1.8% in 4Q08 already constitutes a huge improvement, especially in light of more recent data pointing to positive growth in 3Q09, yet officials have repeatedly said it would be premature to begin reversing policy yet.  Moreover, the ECB has been also mum about how it will coordinate its exit strategy with the ending of fiscal stimulus by its member governments.  Today’s statements recommends that governments step up fiscal consolidation efforts in 2011, but those directions apply to a distant time from now.

The statement otherwise makes predictable comments.  Current rate levels are appropriate.  CPI inflation will turn positive again in the coming months but be only moderately positive over the policy-relevant horizon.  A process of economic stabilization is ongoing and will be followed by a gradual recovery.  High uncertainty is associated with the forecasts, but risks are broadly balanced both with respect to growth and inflation.  Expected inflation remains firmly anchored at the central bank’s medium-term target of below, but close to, 2%.  Low medium-term inflationary pressure in the medium term is confirmed by parallel deceleration in money and credit growth.  None of the usual bases to back up the steady-as-she-goes approach was left out.

In short, this was an uneventful and uninformative monthly ECB policy meeting, as was the Bank of England’s.  In market chatter, the reaction to what Trichet said about the dollar and euro has been mixed.  For some, he said plenty.  For others, including myself, he said too little considering how much the euro has risen since the start of September.  Unless and until there is surprise intervention, escalating rhetoric or actual euro sales, investors are likely to probe the dollar’s scope for further depreciation but do it carefully.  In such a process, the motivator will be a tarnished view of the dollar rather than optimism about Europe’s economy. 

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



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