No Substantial News Made This Month by ECB

October 7, 2010

The ECB left key interest rates (a 0.25% deposit rate, a 1.0% refinancing rate, and 1.75% marginal lending rate) unchanged at levels initially established in May 2009. 

President Trichet’s formal statement made a number of familiar observations.

  • Current “accommodative” policy settings are “appropriate.” 
  • Inflation has moved higher on base effects as expected but is likely to moderate anew next year.
  • Price developments overall will remain moderate in the medium term.  Domestic cost and price developments are contained.
  • Inflation expectations remain firmly anchored in line with the ECB target of below, but close to, 2% CPI inflation.
  • Money and credit growth is trending up but remains weak, confirming contained inflationary pressure in the medium term.
  • A moderate pace of economic growth is likely to continue, “with underlying momentum remaining positive.”
  • Risks to to the growth outlook are slightly tilted to the downside, while risks to to inflation are slightly tilted to the upside in spite of the growth bias.

In the question and answer portion of the press conference, Trichet was asked several times about recent currency market movements but revealed nothing beyond what’s been said in G-7 and G-20 statements, things such as a) excessive volatility being adverse to economies, b) currency values ought to reflect fundamentals, c) a belief shared by Washington that a strong dollar is in the U.S. interest, and d) confidence that China will continue to adopt a more flexible currency policy.  He declined to comment directly on the possibility of intervention as he has always done before.

The euro today poked above $1.40 for the time since February 3, 2010 but is presently back below that key figure, creating speculation that some big operator is sitting on $1.40 with a sell order.

Trichet continued to draw a distinction between enhanced credit support and other non-standard measures, which are all devised as temporary devices and are being phased out progressively, and the basic monetary policy that’s been in place for the past 17 months.  The former are intended to promote market functionality, while the latter is oriented toward preserving inflation in line with the medium-term target and ensuring that price expectations stay anchored and juxtaposed with the target.  Recent changes in eonia, the market overnight rate, are not a signal of a change in monetary policy.

Trichet remained resolute about the need for fiscal consolidation even in the face of soft growth and high unemployment by all but especially those countries with particularly large imbalances like Greece and Ireland. 

Finally, he downplayed the divergence between economic conditions in Germany and other EMU members that are not performing as well.  He observed an element of Germany catching up after many years following reunification when German growth lagged behind the pack.  He said a currency union as diverse and large as the European Monetary Union would always have economies moving at disparate speeds and added in general that vibrant German growth will be good for other Euroland members as well over time.

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

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