ECB Retains Enhanced Credit Support and Key Rate Structure

September 2, 2010

The Governing Council made no change in the configuration of its short-term interest rates.  They are a 1.0% refinancing rate flanked symmetrically by a 0.25% deposit rate and a 1.75% marginal lending rate.  The refinancing rate has been steady for the past 16 months, having earlier been cut in seven steps from 4.25% prior to October 2008 to 1.00% in May 2009. 

Enhanced credit support, non-standard provisions of unlimited but temporary liquidity at low and fixed rates,  is being continued at least until January 18.  The longest maturities for such are three months.  Final six and 12-month refinancing operations mature by yearend.  Investors are advised not to draw any implications for future monetary policy from measures taken on enhanced credit support.

No significant changes occurred in the ECB’s rhetoric.  Current rates are “appropriate.”  Inflation expectations are “firmly anchored” and consistent with target.  Growth and inflation are expected to be “moderate.”  Whereas growth last quarter and this one have exceeded expectations, recovery in the future will be dampened by balance sheet adjustments and soft labor markets.  Weak money and credit growth developments point to contained medium-term inflationary pressure.

The ECB staff unveiled new growth and price forecasts.  An upward revision in projected real GDP to 1.4-1.8% this year and 0.5-2.3% in 2011 stems from faster-than-assumed 2Q and 3Q activity, not a change in the underlying growth outlook.  Officials now anticipate 1.3 percentage points more economic growth in 2009 than they did nine months ago.  A modest upward adjustment in predicted inflation reflects higher commodity prices.  The ECB revises its projections quarterly during the final month of each quarter.  The table below presents the evolution of ECB thinking, wherein the date of each forecast is noted in the left most column.  The ECB format statement can be read here.  Growth risks from the baseline forecast are “tilted slightly to the downside.”  But price risks “are slightly tilted to the upside.”

  GDP ’09 GDP ’10 GDP ’11 CPI ’09 CPI ’10 CPI ’11
09/10   +1.4/+1.8% +0.5/+2.3%   +1.5/1.7% +1.2/2.2%
06/10   +0.7/1.3% +0.2/2.2%   +1.4/1.6% +0.2/2.2%
03/10   +0.4/1.2% +0.5/2.5%   +0.8/1.6% +0.9/2.1%
12/09 -4.1/-3.9% +0.1/0.5% +0.2/2.2% +0.3% +0.9/1.7% +0.8/2.0%
09/09 -4.4/-3.8% -0.5/+0.9%   +0.2/0.6% +0.8/1.6%  
06/09 -5.1/-4.1% -1.0/+0.4%   +0.1/0.5% +0.6/1.4%  
03/09 -3.2/-2.2% -0.7/+0.7%   +0.1/0.7% +0.6/1.4%  
12/08 -1.0/0.0% +0.5/1.0%   +1.1/1.7% +1.5/2.1%  
09/08 +0.6/0.8%     +2.3/2.9%    
06/08 +1.0/2.0%     +1.8/3.0%    
03/08 +1.3/2.3%     +1.5/2.7%    
12/07 +1.6/2.6%     +1.2/2.4%    

The paragraph dealing with fiscal policy makes the point that the drag from needed cutbacks will be mitigated in part by the boost to confidence from fiscal consolidation.

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



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