ECB Press Conference Reveals No Fresh Information

February 4, 2010

The ECB Governing Council left its rate structure unchanged and deferred new details on the gradual phasing-out of unconventional liquidity enhancements to the March press conference.  Since May 2009, the refinancing rate has been at 1.0% and flanked by a 0.25% deposit rate and a 1.75% marginal lending rate.  Overnight money, aka the Eonia rate, has stayed very near the deposit rate because of the market’s abundant liquidity.

Today’s ECB statement rehashes the content of January’s press conference with no significant additions or deletions.

  • Current rates are “appropriate.”
  • The economic and monetary policy assessments each point to subdued near-term price developments and low inflationary pressure and price stability over the medium term.
  • Real GDP is expected to expand at a moderate pace this year, but recovery will be unevenly shared and is subject to uncertainty.
  • Unemployment is still cresting.  The economy has plenty of slack.
  • Risks to the growth and price outlooks are balanced.  Upside and downside risk factors remain the same as noted in January.
  • Although on-year inflation of 1.0% remains well below target, indications of expected inflation in the medium to longer term remain firmly anchored below, but close to, 2.0%.
  • The “net tightening of credit standards applied by banks continued to diminish in 4Q09.”  Banks are urged to strengthen their capital bases but also to ensure the availability of credit to non-banks.

On the key issue fiscal deficits, which have been unsettling Greek and other bond yields, ECB President Trichet expressed satisfaction with the Greek government’s goals and recently announced fiscal cutbacks and reiterated the advice that budget consolidation begin no later than 2011 and that reductions “exceed substantially the annual adjustment of 0.5% of GDP set as a minimum requirement by the Stability and Growth Pact.”  Spending cuts are preferable to tax increases.  The ECB has not acquiesced to a bail-out of Greece by the EU.

When the Great Recession intensified, the ECB cut its refinancing rate from a peak of 4.25% in increments of 50 basis points in October and November 2008, 75 bps in December, 50 bps in January 2009 and March, and 25 bps each in April and May.

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



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