ECB Review: New Ground Not Broken

November 5, 2009

The ECB left its deposit, refinancing and marginal lending rates at 0.25%, 1.0%, and 1.75% as expected.  Those levels have been in place since May, and today’s decision was anticipated.  Seven reductions of the refinancing rate were implemented between October 2008 and May 2009 spaced as follows: 50 bps in October 2009, 50 bps in November, 75 bps in December, 50 bps in January, 50 bps in March, 25 bps in April and 25 bps in May.

The need to unwind monetary stimulus in a timely fashion was repeated, but Trichet was not specific about which liquidity measures would be modified first, when this would happen or exactly how.  He wouldn’t say if next month’s 12-month tender would be offered at 1.0% or something perhaps slightly higher.

The written statement again makes no mention of the pricey euro.  In Q&A, President Trichet reiterated his own recent remarks that the strong dollar endorsement by U.S. officials is very important, that recent forex volatility (meaning excessive euro strength) is adverse for the economy, and that a strong dollar is in the best U.S. interest, too.

The latest written statement includes all the recent buzzwords and expressions to signal a steady and consistent policy and includes no surprising deviations from what one would expect.  The familiar signposts are

  • Rates are appropriate.
  • Past easings of monetary and fiscal policy are still feeding through to the economy.
  • Inflation expectations are well-anchored and in line with the medium-term inflation target of below, but close to, 2%.
  • Data since the October meeting confirmed the previous assessment.
  • The economy is stabilizing and expected to recover at a gradual pace.
  • But uncertainty continues to be high.
  • Moderating money and credit expansion confirm assessment of low inflationary pressure over the medium term.
  • Base effects related to commodity price swings lie behind negative CPI inflation now.
  • Positive inflation will be restored soon (again because of base effects) but but stay only moderately positive over the policy-relevant horizon.
  • Risks to the growth and price baseline forecasts are each broadly balanced.

The statement asserts GDP growth will be positive in 2H09 and, unlike the October statement, explicitly indicates that “not all our liquidity measures will be needed to the same extent as in the past.”  Banks are again urged to build deeper reserves.  Governments are urged to design and then implement a plan of fiscal consolidation.  “High public deficits and debts may complicate the task of the single monetary policy to maintain price stability.”  One thought from early statements that was not included today is that recovery in the euro area is likely to be uneven.  This omission was made even though data in the last month continued to evidence a wide disparity of trends within the bloc.

All in all, this was an uneventful month for ECB policy.  December’s meeting will be more significant.  New forecasts will be unveiled then, and the details of coming long-dated refinancing operations will be spelled out.  The lack of a policy shift leaves the euro’s directional bias upward.  The currency’s trend has been upward, in part because investors find the ECB’s ability and determination to reverse stimulus in a timely way more credible than the Fed’s.  Modifying the euro’s trend probably required something different from the ECB than the same rhetorical words that note the currency is too strong and a growth risk factor.

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



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