ECB Makes Changes in Non-Standard Measures but Not Interest Rates

October 6, 2011

In the final ECB Governing Council meeting to be led by the outgoing Jean-Claude Trichet, non-unanimous votes were taken to keep interest rates steady but to add “very important” non-standard measures that will hopefully restore a better transmission of the bank’s interest rate signals.  A statement from the council failed to call existing policy “accommodative,” as last month’s statement had, and a sentence from previous statements — “monetary liquidity accumulated prior to the period of financial market tensions continues to be ample” — was also deleted this time.

The refinancing rate remains at 1.5%, following hikes of 25 basis points in April and May.  The deposit rate is 0.75%, and the marginal lending rate is 2.25%.  The implication of the revelation that the decisions not to cut rates and to extend non-standard stimulus were arrived at by “consensus” is that some Council members wanted to cut rates now and that others opposed the proposed expansion of non-standard market support.  Doves and hawks got part but not all they wanted in this compromise.

This month’s statement anticipates “very moderate” economic growth in the second half of 2011, which is already half over, and does not comment per se on likely growth in 2012.  Growth in 2H11 had previously be thought likely to be moderate.  Risks to the baseline forecast continue to be skewed to the downside and in an intensifying way, while price risks around a predicted deceleration of inflation next year from 3% now are still considered broadly balanced.  As in September, the statement claims that “a very thorough analysis of all incoming data and developments over the period ahead is warranted.”

Several non-standard measures were unveiled, but the most illustrative comment in that regard emerged in Trichet’s press conference when he observed that the ECB’s balance sheet had expanded about 77% since the start of the financial crisis, which is roughly a third as much as the percentage growth of the Fed’s balance sheet over the same period.  Changes in the non-standard stimulus include

  • Restoration of two one-year refinancing operations, the first of 12 months to be tendered this month and the other of 13 months to be done in December.
  • Monthly refinancing operations with unlimited allotment are to continue at least through July 2012.  That’s a half-year further extension from the horizon indicated two months ago.
  • Three month operations have been extended through mid-2012, which also pushes out the period covered by another six months.
  • The SMP program by which the sovereign bonds of selected members are bought as deemed necessary will continue.  The amounts purchased, if any, are reported by the ECB on a weekly basis.  Officials by intent have been very vague about this policy since it was launched in May amid considerable controversy.
  • A new EUR 40 billion program of covered bond purchases was introduced.  These purchases will be completed by October 2012.

In his final press conference, ECB President Trichet was asked a number of times to elaborate on if he were leaving with any regrets.  He opined that these have been a demanding, turbulent eight years, and that major structural change in the global economy is occurring as he now departs center stage.  The main shortcoming of economic and monetary union has been insufficient governance of existing rules, which still can be fixed. 

Jean-Claude Trichet became the ECB’s second president almost eight years ago on November 1, 2003.  He inherited a euro that was worth $1.1593, and the currency is now 15.4% stronger against the dollar than then.  Net trade-weighted appreciation over the Trichet era was considerably smaller in size than the gain versus the dollar.  During the 8-year period, CPI inflation averaged 1.8% per year, right in line with the ECB’s mandate of below, but close to, 2%.  Real GDP growth, on the other hand, was low at 1.1% per annum, and regional unemployment of 10.0% now is even higher than 8.9% eight years ago.  One of the ECB’s mantras that asserts that the anchoring of inflation expectations in line with the price stability target “is a prerequisite for monetary policy to make its contribution toward supporting economic growth and job creation in the euro area” was reaffirmed yet again in today’s released statement.  However, the juxtaposition of perfect pitch in preserving internal and external price stability with disappointing growth GDP and jobs gives pause to whether officials have placed too much faith in the belief that a central bank’s best contribution to real growth is made by always doing whatever is believed necessary to meeting low, stable, and predictable inflation.

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



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