ECB November Press Conference

November 4, 2010

After leaving interest rates unchanged as expected, ECB President Trichet’s statement didn’t break new ground.  Rate settings are accommodative and appropriate.  Euroland’s recovery is expected to retain positive momentum in an uncertain environment.  Monetary analysis points to contained inflationary pressure in the medium term.  Economic analysis shows growth contribution from both exports and domestic demand and looks to a moderating inflation trend from the current 1.9% in the course of 2011Inflation expectations are firmly anchored.  Risks to the baseline forecasts are tilted slightly to the downside in the case of growth and slightly to the upside in the case of inflation.

In Q&A, Trichet avoided making news on areas of recent concern.

  • The euro is one of several factors upon which the views on growth and inflation are formed.  Trichet would not be drawn into expressing a view on recent euro appreciation other than to reiterate his appreciation for U.S. officials acknowledging that a strong dollar is in the U.S. interest.  Those words may have been expressed by U.S. officials, but U.S. policies send a different message.  He deferred to G20 statements on matters of Chinese foreign exchange policy.
  • Trichet wouldn’t comment on why national bonds had not been bought in the three past reported weeks other than to say that the policy launched in May of buying the debt of troubled ECB members remains.  Trichet underscored that this and all measures of unconventional liquidity support are transitory in nature and do not affect the underlying monetary policy.  He reiterated that it would be possible to raise the key ECB rates even before all unconventional measures are ended.  Private analysts look for such a moment to occur in the second half of 2011.
  • Many questions concerned the widening bond premium between Ireland and Germany.  He would not be drawn into indicating how that might impact the central bank’s policy.  In strong language, he again urged more rigorous enforcement of fiscal rules and better surveillance of fiscal policies.
  • He dismissed speculation that being in the final year of his eight-year mandate as ECB President would in any way make him a lame duck and hurt his effectiveness or the effectiveness of the Governing Council.
  • Trichet said there was not meaningful difference in the Council’s views on growth and inflation since its previous October meeting.  New forecasts and presumably clarification of the timetables on unconventional enhanced credit support will be unveiled next month.  For now, the slight upside tilt of risks to the inflation outlook are not more so or less so than what officials perceived a month ago despite a stronger euro now than then.
  • He said the firmer 3-month euribor rate, now marginally above 1%, is the result of market demand and not policy design but added such a development provides evidence that market functionality is normalizing.

Monetary policies have become more stratified this week.  Rates were raised in Australia and India.  Quantitative easing was renewed in the United States.  The Bank of England did not follow the Fed’s cue, but British quantitative easing in early 2011 remains possible.  The choice at the ECB remains focused on how to implement an exit strategy for various liquidity-supportive measures.  Overall policy, defined by the ECB’s interest rate structure, hasn’t changed since May and remains very accommodative.  Eventually that will be normalized, too, but a 1.0% refinancing rate remains “appropriate” for now.  The Bank of Japan still needs to be heard, and that will happen tonight.

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

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