ECB Review: Tightening Unlikely Next Month

May 5, 2011

The suspense heading into today’s press conference involved whether ECB officials would use code language — “strong vigilance is warranted” — to suggest a likely second rate hike in early June.  The formal statement and press conference Q&A did not sent such a signal, instead repeating language from the April decision that “we will continue to monitor very closely all developments with respect to upside risks to price stability.”  The euro at 13:15 GMT was trading 0.9% lower against the dollar than just before the announcement, as analysts had been swinging toward the view that a second rate increase in June would indeed by implied and disappointment that it was not. 

There was little new ground regarding the parameters for anti-inflationary monetary policy and no signaled change in the unconventional measures being used to enhanced market functionality.  The separation of these two elements of policy was reaffirmed; each is decided independently of the other. 

Key repeated points are

  • Policy is very accommodative as reflected in low interest rates across the maturity spectrum.
  • Economic growth is positive and expected to continue.
  • Risks to growth are broadly balanced.
  • The acceleration of inflation mostly but not only reflects higher commodity prices.
  • CPI inflation over coming months will likely “stay clearly above 2%,” which means above the ECB’s target of less than but close to 2%.
  • Risks to the inflation outlook remain skewed to the upside.
  • Uncertainty remains very elevated.
  • Utmost priority is attached to keeping medium-term inflation expectations firmly anchored at the ECB target and to preventing any second-order inflation in either wages or pricing behavior from the commodity price shock.
  • Although money and credit growth have been low, there levels are amply abundant to facilitate the accommodation of price pressures.
  • Unconventional monetary measures have been so designed to be temporary in nature.

The ECB statement welcomes the agreed aid package for Portugal, claiming that such “addresses in a decisive manner the economic and financial causes underlying current market concerns and will thereby contribute to restoring confidence and safeguarding financial stability in the euro area.”  Many of the questions in the press conference, which was held in Helsinki rather than Frankfurt, dwelt with the debt difficulties of Portugal, Greece, and Ireland.  President Trichet steadfastly avoided providing any variation in what has been said before on these issues and used such questions to underscore that monetary policy making at the ECB is crafted for the economic average trends of the whole common currency area, not any particular member or group of members.  Likewise, Trichet rejected any notion of steering interest rates back to some kind of “normal level.”  Rates are set at whatever level is felt necessary to deliver medium-term price stability.  Policy depends always on economic circumstances.

The June meeting is scheduled for the 9th in Frankfurt.  Note such is on the second rather than first Thursday of June.  At that time, new quarterly price and growth forecasts will be unveiled, but based on language patterns utilized in the past, an increase of the 1.25% refinancing rate of the 0.5% deposit rate and 2.0% marginal lending rate that flank it, seems doubtful.  Most likely, the statement in June will contain the “strong vigilance” allusion, preparing markets to expect a second rate advance in July.

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



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