Latest ECB Tactics Not Helping Euro Stabilize

May 6, 2010

As expected, the ECB Governing Council left its three rates unchanged and where such have stayed for the past 12 months: a 1.0% refinancing rate flanked symmetrically by a 0.25% deposit rate and a 1.75% marginal lending rate.  Forex dealers responded to an ECB strategy of not appearing to be panicking and instead emphasizing continuity by depressing the euro to a new low for the move of $1.2688.   A statement from authorities contained just one noteworthy modification, the addition of the following sentence: “Monetary policy will do all that is necessary to maintain price stability in the euro area over the medium term.”  That point was emphasized later by President Trichet, when given the chance to say that preserving the euro area is a top goal, instead replied that price stability in the medium term is the central bank’s number one priority.

The statement made all the familiar points of other recent press conferences:

  • Rate levels are appropriate.
  • Inflation expectations remain firmly anchored in line with the ECB’s medium term target of below, but close to, 2%.
  • Moderate price developments are expected over the policy-relevant horizon as rising commodity prices are balanced with low domestic price pressures..
  • Growth continued in 1Q, albeit slowed by weather, but seem to have picked up more recently.
  • A moderate, uneven pace of growth in 2010 is projected.  The outlook faces high uncertainty.
  • Negative M3 growth understates the underlying pace of monetary expansion, but money and credit growth as a whole point to contained inflationary pressure over the longer term.
  • Growth risks are balanced.  Price risks are skewed a little to the upside in the short run but balanced in the medium term.
  • Decisive fiscal consolidation is recommended.

The spin of steadiness by officials was reinforced in the question-and-answer portion of the press conference held in Lisbon by denials of any consideration by officials to buying Euroland government bonds or devising a contingent mechanism for handling member defaults. ECB President Trichet also declined to give an opinion on the speed of the euro’s recent decline.  The intensifying rate of depreciation is symptomatic of a credibility crisis.  Investors have questioned if a single monetary policy can co-exist with sixteen different fiscal policies and an unenforceable Stability and Growth Pact.  The ECB has not escaped the markets’ doubts, having reneged on a promise not to make exceptions regarding its standards on acceptable collateral for its loans.

Taking a stand that nothing has changed including the primacy of medium term price stability as the compass of monetary policy would maybe have been sufficiently reassuring a few months ago.  But the crisis has evolved to a point now that such upbeat marketing of monetary policy simply looks surreal and laughable if it weren’t so serious.  Trichet probably concluded that since he had nothing really hopeful and convincing to say about preventing the spread of the Greek debt crisis, the best tactic was to say as little different new as possible.

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



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