ECB Preview

July 7, 2010

The Governing Council will leave its interest rate settings unchanged.  The refinancing rate has been 1.0% since May 2009 and will remain at that level into 2011.  At Thursday’s monthly press conference and in the released statement from President Trichet, the usual points will be made that

  • Monetary policy remains appropriate.
  • Changes in the enhanced credit support program occur to ensure proper functioning of the money market but do not connote a change in monetary policy.
  • Moderate but uneven economic growth is likely to continue.
  • Continuing low domestic price pressures are suggested from the findings of the staff’s economic analysis, while an analysis of monetary and credit growth trends points confirms that the constraint on inflationary pressure will continue into the medium term.
  • Expected inflation remains well-anchored.
  • Governments with high deficits should administer budget cuts to regain consistency with the Stability and Growth Pact guidelines in a timely manner.

New macroeconomic forecasts unveiled at the June press conference revised projected GDP growth in 2010 slightly upward to 0.7 – 1.3% but trimmed the forecast for 2011 downward to 0.2 – 2.2% reflecting softer domestic demand.  Projected CPI inflation in 2010 was revised to 1.4 -1.6% from a prior forecast range of 0.8 – 1.6%.  2011 inflation was revised to 1.0 – 2.2% from 0.9 – 2.1%.  Inflation thus remains below the target of “below but close to 2.0%” even next year, giving officials the latitude to delay a rate increase especially since fiscal austerity is coming.  Officials have rejected the likelihood of a double-dip recession and slide into deflation.

The euro hit a low of $1.1878 two days before the June meeting and has recovered about 6% since then.  It remains out of favor, however, with one investment bank now projecting a slide to $1.08 by the end of this year and nearer to dollar parity in 2011.  Long-term interest rates and equity prices have stayed at rather low levels. President Trichet defends the euro as a resounding success because 1999 – 2010 has been a period of low internal inflation.  Although down from a peak of $1.6038, the euro is currently above its launching level of about $1.17 and all-time mean value of $1.1835.

Real GDP in the euro area grew just 0.6% at an annualized rate between the third quarter of 2009 and the first quarter of this year, but growth likely accelerated to a 2-3% annualized pace last quarter.  PMI readings of 55.6 in manufacturing, 55.5 in services, 49.7 in retail, and 56.0 in construction has shown greater resilience lately than their U.S. counterparts, and indices of confidence have been better than feared.  Overall business sentiment unexpectedly climbed 0.3 points in June to 98.7, and consumer confidence firmed one point to minus 17.  The big worry concerns the peripheral economies — Moody’s downgraded Greek debt by several notches, for instance — and the impact of mandated fiscal austerity that will be coming on stream.  Unemployment held at 10.0% in May, and consumer price inflation edged further below target in June to 1.4%.  Producer price inflation has risen to 3.1% on import costs, but on-year growth of M3 and private credit in May was at minus 0.2% and +0.2%.  Consumers aren’t participating in the recovery.  Consumption slid 0.1% in 1Q10 and was unchanged from the level in 1Q09.  Real retail sales fell 1.2% in April and by 1.5% from a year earlier.

The ECB has been buying the national bonds of member countries for the past two months, something officials previously said they would not do.  Trichet has been mysterious about how much and for how long this activity will go on.  He will play the matter close to the vest at tomorrow’s 12:30 GMT press conference as well.

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



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