ECB Watching Inflation Closely

February 3, 2011

As expected, the ECB kept its key interest rates — a 1.0% refinancing rate flanked by a 0.25% deposit rate and 1.75% on the marginal lending rate — unchanged and declared such to be still accommodative yet appropriate.  The views remain intact of positive underlying growth ahead, above-target inflation in the near term due to commodity price pressures, and longer-term inflation in line with price stability, that is consumer price inflation below but close to 2%.  Growth risks remain “slightly tilted to the downside” and price risks are “still broadly balanced but… could move to the upside.”  An extra upside risk was added:  not only are has pressure increased on energy and commodity prices, but also in “earlier stages of the production process.”  Accordingly, a possibility exists that inflation could rise temporarily further in the near term and probably will surpass 2% most of 2011.  However, expected inflation remains firmly anchored, and officials agree such will be restored toward the latter part of this year.

New macroeconomic forecasts will be unveiled in March, and these will give a better idea about how soon the ECB will be lifting interest rates, if indeed it does later this year.  In December, growth was projected to lie in a 0.7-2.1% range this year and 0.6-2.8% in 2012, while consumer price inflation was put at 1.3-2.3% in 2011 and 0.7-2.3% in 2012. 

Trichet was again defensive in denying any “euro crisis” and would not be drawn into commenting on German Chancellor Merkel’s assertion that one exists.  While adding that this is no time for complacency, the ECB president’s point is that better internal and external euro stability has been preserved over the last dozen years than existed before the euro’s creation.

In the discussion of money and credit growth, a dip in the rate of M3 expansion in December is not considered an indication of a general weakening of monetary dynamics, although the moderate pace suggests that inflationary pressure over the medium to long term should remain contained.

The tone of the formal remarks on fiscal policy recommendations were toughened slightly:  “It is now essential that all governments fully implement their fiscal consolidation plans in 2011.  Where necessary, additional corrective measures must be implemented swiftly.”

Finally, Trichet continued to stress that a strict “separation principle” exists between its standard measures, which address the need to preserve monetary stability, and non-standard measures that are in place to fix dysfunctionality in particular markets that are still behaving abnormally.  He has often suggest that key interest rates could be raised before all unconventional liquidity-adding measures have been removed.

The current interest rate structure has been in place since May 2009.  The record low 1.0% refinancing rate compares with a cyclical high of 4.25% for three brief months from July to October of 2008.  The next interest rate meeting of the ECB Governing Council is scheduled for March 3, four weeks from today.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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