ECB Preview

January 11, 2012

Opinions are mixed over whether ECB policy will be eased for a third consecutive month in January, but the majority view, partly because there were some dissenters against the rate cut in December, looks for the Governing Council to pause, pending more information. 

Actions have been more accommodative than the bank’s rhetoric, which puts the onus for resolving the debt crisis on the national governments.  However, officials

  • Cut the ECB refinancing rate 25 basis points each in November to 1.25% and December to 1.00%,
  • Pumped EUR 489 billion of 1% into the banks via an unprecedented 3-year long-term repo operation,
  • Expanded the range of acceptable collateral,
  • Have not intervened to limit a 4.7% decline of the euro against the dollar since the December meeting,
  • Have continued to utilize the SMP facility, which buys limited amounts of peripheral member sovereign debt.

It appears that real GDP in the euro area may have contracted 1.5% last quarter (over 5% annualized), including a 0.25% drop in Germany.  In December, ECB officials conceded the likelihood of a recession that began last quarter but held the view that the downturn would be short-lived and mild.  One of the keys at tomorrow’s press conference will be if officials qualitatively imply a more severe recession than imagined previously.  Forecasts released in December had projected that GDP this year would fall within a negative 0.4% to positive 1.0% range, and they predicted growth between 0.3% and 2.3% in 2013. 

Many data released over the past month have not been as depressed as feared.  The manufacturing and service-sector purchasing managers indices both printed at a somewhat better level in December than in November, resulting in a composite score of 48.3 that implied a slower contraction than in November when the composite reading was 47.0.  The Sentix gauge of investor sentiment improved 2.9 points in January to negative 21.1.  In Germany, industrial production (minus 0.6%) fell less sharply in November than presumed, and exports went up 2.5% that month.  Industrial orders rose 1.8% in October.

That said, there was plenty of bad news, too.  Retail sales in October-November were 0.7% lower than the 3Q mean.  Unemployment of 10.3% is at the high for the move.  Construction output and industrial production were 6.2% and 0.9% lower in October than the 3Q mean.  Meanwhile, inflation has crested, and money and credit growth are again slowing from a meager high.  Many of the group’s members could see their credit rating downgraded later this month by Standard and Poor’s, notably France.  Greece is fast running out of time to meet conditions for the next installment of its bailout money.  Interest rates in the peripherals remain far too high.  10-year sovereign yields above 7.0% in Italy are especially alarming. 

One uncertainty ahead of tomorrow’s announcement and press conference involves the many new faces on the six-person Executive Board.  Mario Draghi replaced Trichet as the president of the ECB at the start of November, and the terms of Asmussen, who replaced Stark, and Coeure, who replaced Bini-Smaghi, began this month.  A fourth director, Praet, came on Board just seven months ago and switched assignments this month to become the central bank’s chief economist.  Whatever the impact from this reshuffle of key personnel, the ECB has deeply ingrained institutional constraints biased toward a conservative, anti-inflationary policy bias.  Even when ECB officials choose to step harder on the gas pedal, the stimulus is often undermined by rhetoric that habitually reminds us of the continuing readiness to press on the brakes preemptively should the need arise.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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