Exit Strategy of Unconventional ECB Measures Paused

December 2, 2010

The ECB:

  1. Retained its key interest rate structure of a 1.75% marginal lending rate, a 1.0% refinancing rate, and a 0.25% deposit rate and called these levels appropriate and accommodative.
  2. Reiterated that unconventional measures are “temporary by nature” and intended to permit an appropriate transmission of the primary policy stance.
  3. Chose to continue at least until early second quarter its main and 3-month refinancing operations with full allotment at a fixed 1% rate tender rather than revert to variable rate auctions after the end of this year.
  4. Reaffirmed that expected inflation is firmly anchored and in line with the mandated target of below, but close to, 2%.
  5. Released new growth and inflation forecasts that depict moderate inflation over the policy-relevant time horizon and positive continuing momentum in the economic recovery.  Projected GDP was revised up marginally, and so was the forecast for inflation mainly to reflect consistently greater-than-assumed economic momentum since recovery began in the third quarter of 2009.
  6. Risks to the growth and price baseline forecasts were modified a bit.  Growth forecasts at the November conference were called slightly tilted to the downside and now are said to be tilted to the downside, dropping the adverb “slightly.”  Price risks were changed from “slightly tilted to the upside” to “broadly balanced.”
  7. Reaffirmed that the SMP program in place since May is ongoing.  The SMP allows the European Central Bank to buy sovereign debt of individual members of the EMU when it deems such to be appropriate to facilitate the transmission of the basic ECB monetary policy.  It was reiterated that SMP operations are being sterilized.
  8. Observed that latest money and credit growth trends confirm that inflationary pressure over the medium term is likely to remain contained.

The new baseline forecasts and previous ones are shown below.  The ECB updates its forecasts quarterly and introduces a new year in its time horizon each December. 

  GDP ’10 GDP ’11 GDP ’12 CPI ’10 CPI ’11 CPI ’12
12/10 +1.6/+1.8% +0.7/+2.1% +0.6/2.8% +1.5/1.7% +1.3/2.3% +0.7/2.3%
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 +0.1/0.5% +0.2/2.2%   +0.9/1.7% +0.8/2.0%  
09/09 -0.5/+0.9%     +0.8/1.6%    
06/09 -1.0/+0.4%     +0.6/1.4%    
03/09 -0.7/+0.7%     +0.6/1.4%    
12/08 +0.5/1.0%     +1.5/2.1%    


The question and answer part of the news conference dwelt on Euroland’s debt crisis, whether the ECB thinks the market is acting responsibly, and what the central bank is prepared to do in response.  The ECB did not use the bazooka as one press reporter observedIt’s actions to alleviate market tensions were the minimal that analysts were anticipating.  Trichet would not be drawn into calling markets “speculative.”  He did defend the record of the ECB and the Ezone economy with the following observations:

  • Germany has enjoyed lower inflation since 1999 than any time in the past half century.
  • The euro area as a whole will have a considerably smaller fiscal deficit to GDP ratio than either the United States or Japan in 2010 and 2011.
  • Since recovery began in 3Q09, activity has surpassed expectations on the upside in Euroland more consistently than in most other advanced economies.

Trichet said today’s decisions by the Governing Council of the ECB were adopted by consensus and, in the case of the SMP purchases, by an overwhelming majority.  That means some dissension persists.  He said members do not go to these meetings predisposed to one or another decision but rather move where the data and discussion about other developments lead them.  Defending the ECB record of delivering its mandate of price stability for a dozen years, he continues to view a breakup of EMU as a non-starter.  In criticism, however, he said better fiscal governance needs to complement monetary governance, and he again reminded the audience that it was the big members of Euroland now complaining about a transfer union who made the decisions back in 2004 and 2005 that crippled enforcement of the Stability and Growth Pact.  They have themselves to blame.

Finally, Trichet stressed that ECB policymakers remain alert as conditions evolve to modifying both the basic monetary policy stance and the unconventional measures that are needed to transmit that policy.  All in all, Trichet’s remarks were predictable based on past performance but did not constitute the shock and awe display that some market participants had perhaps been expecting.  Large peripheral bond premiums are likely to persist until a fiscal cohesion among politicians of the euro area appears as credible as the ECB’s mandate to achieve price stability.

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

Tags: ,


Comments are closed.