ECB’s Thursday Meeting

April 7, 2010

I expect to find the usual phrases in the ECB statement explaining the decision to leave the key deposit, refinancing, and marginal lending rates at 0.25%, 1.0%, and 1.75%.  These will include assertions that current rates are appropriate, that expected inflation remains anchored and consistent with the target of below but close to 2%, that risks to the price and growth forecasts are balanced, and that GDP will expand only moderately and unevenly.  Real GDP growth stalled in the final quarter of 2009 according to revised data released today, and domestic final sales accounted for growth of minus 0.3 percentage points.  Several more  data releases, however, suggest a rebound of growth in 1Q10 to at least 0.5%, so the unevenness applies to comparisons across countries as well as between successive quarters.  The region’s PMI readings rose 2.4 points to 56.6 in manufacturing, 2.3 points to 54.1 in services, and 2.3 points to 46.9 in retail last month.  Overall economic sentiment continued to improve, rising by 2.3 points to 97.7 in March from February and by 11 points over the past six months.  Industrial production shot up 1.7% in January, whereas orders fell 2.0% that month.  Recent price data have meanwhile point to a reduced the risk of deflation.  The CPI in March was 1.5% higher than a year earlier, an increase from on-year inflation of 0.9% in February.  Producer prices were 0.5% lower than a year earlier in February, which is smaller than the 7.6% drop booked in the twelve months to last September.  On the other hand, labor costs went up 2.2% in the year to 4Q09, down from 3.0% in the year to 3Q09.  Unemployment is still cresting, having reached 10.0% in February, 1.2 percentage points greater than a year before.  The ECB last month released a forecast that centered CPI inflation in 2011 on 1.5%, which is below target.

The ECB will probably not increase the 1.0% refinancing rate before yearend.  It doesn’t need to to do that to lift overnight market rates during 2H10.  Such can be engineered by withdrawing some of the liquidity-supporting facilities.  Meanwhile, what ECB President Trichet says about Greece’s debt woes, which have hit confidence in the euro’s legitimacy as a currency that’s here to stay.  Trichet has mocked alarmist speculation about a break-up of the common currency, but yesterday’s record premium on Greek bond yields of 409 basis points relative to 10-year bunds shows that markets are not heeding his denials.

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



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