ECB Press Conference and Decision

August 4, 2011

The Governing Council of the European Central Bank upgraded the degree of uncertainty in the outlook to “particularly high” from “high.” Uncertainty complicates the segregation of the basic monetary policy of lessening accommodation from the use of non-standard liquidity infusions to ensure better monetary transmission of its policy.  With greater urgency than before, President Trichet pressed governments to get ahead of the curve on structural reforms and fiscal consolidation.

Here’s what the ECB has done and said.

  • No changes were made in central bank rates, as expected. 
  • Officials promise to continue to monitor very closely all developments with respect to upside risks to price stability.  Such language implies a good probability of a third rate hike no later than October. 
  • They reiterated a balanced risk assessment on the outlook of moderate growth.  Many would dispute such a characterization in light of the worse global outlook and spread of the regional debt tensions to bigger economies like Spain and Italy.
  • The existing main refinancing operations with as much liquidity as requested were extended to the the end of 2011. 
  • Three-month refi operations will be allotted in each month of 4Q11.
  • A six-month refi operation will be allotted later this month.  Operations of that maturity had been stopped for  while.
  • Trichet strongly suggested that the ECB today resumed its SMP program that buys peripheral bonds.  None had occurred since March.  However, market feedback suggests that the ECB was buying only bonds of the smaller peripherals like Ireland and Portugal and had not purchased any Spanish or Italian debt.  The Bank of Spain is believed to have bought Spanish bonds.

The statement touches several familiar points.  Anchoring inflation expectations is essential and has been done thus far.  The policy remains accommodative, and the rate hike taken in July has been justified by information since then.  Despite historically low interest rates, financing conditions are favorable, and ample liquidity from previously rapid monetary growth could “facilitate the accommodation of price pressures” if policymakers aren’t careful. 

The euro is trading 0.7% softer against the dollar than it was at 10:45 GMT.  It has lost 1.3% since the Wednesday close in New York, but so far it is holding above the psychological threshold of $1.4000.  Since Wednesday’s close, the euro has advanced against the yen but weakened versus the Swiss franc, underscoring the more effective currency market attack of the Japanese than Swiss Authorities.

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



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