ECB Preview

February 3, 2010

This will not be a significant and newsworthy monthly meeting of the ECB Governing Council.  Only three weeks have passed since the last one, and officials prefer to make headlines in those months that coincide with new quarterly staff forecasts, that is, March, June, September and December.  Nothing has been said by an ECB official to suggest very different thinking from the last projections.  Nor have released data warranted such.  Slightly positive but uneven economic growth is predicted.  Quantitative easing has begun to get reversed, but liquidity is still very abundant.  Hence very short-term interest rates should remain near the deposit rate of 0.25%.  Inflation is subdued now (1.0% headline and core) and will remain so in the face of slow growth and plenty of unused productive resources.  Monetary and credit growth also point to price stability in the medium term.  M3 in 4Q09 was 0.1% below the level in 4Q08, down from on-year growth of 7.9% in 4Q08 and 12.1% in 4Q07, while bank lending to the private sector fell 0.5% in the year to 4Q09 after on-year increases of 6.9% in 4Q08 and 11.2% in 4Q07. As in January, officials will again stress that the regional recovery faces big uncertainties and that the reversal of emergency stimulus should be done prudently and gradually.  It’s not time to declare victory over the Great Recession.

Data released since the January meeting were decent for the most part.  Industrial production and orders in Euroland rose in November by 1.0% and 2.7% from October.  Those increases were much bigger than forecast.  Economic sentiment printed at 95.7 in January versus a fourth-quarter average score of 91.9.  Unemployment ticked up another tenth in December to 10.0% but matched expectations.  Retail sales were flat in December, another disappointing result, and construction output fell 1.1% in November.  Unseasonably wintry weather have amplified weakness in these areas.

Many of the questions to Trichet in January were about Greece’s debt problems, and he refused to concede ground in terms of cutting that nation or others with large deficits like Spain and Ireland any slack in terms of compromising monetary policy for all 16 member nations to help out a few peripherals.  At the end of the day, the EU will not handle this matter as governments and central banks did Lehman Brothers, but it’s far too early to publicly say that lifelines from healthier members will be made available.  A tough love approach on Greece inadvertently addressed a different policy issue, namely that the euro was getting a bit pricey.  Since the January meeting, the euro has lost about 4% against the dollar and yen and about a half-percent versus the Swiss franc.

The ECB announcement is set for 12:45 GMT and will be followed by a press conference starting at 13:30 GMT.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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