ECB Doesn’t Send a Message of Urgency to Ease Further

January 12, 2012

The ECB announced no new stimulus steps, having done plenty in December. 

In contrast to the expectation of substantial further policy easing  in February or March by many analysts, today’s statement and comments to the press did not offer reinforcing verbal support for that belief.  In his third press conference since taking the helm of the European Central Bank in November, President Mario Draghi characterized the fiscal contraction commitments by several stressed economies over recent months as “significant” and “extraordinary,” but he did not imply a quid pro quo that the ECB would ease automatically in response.  He underscored the considerable additional tasks ahead, such as structural reforms to mitigate the drag of fiscal cutbacks, completion of a new fiscal contract in the EU with “unambiguous and effective” rules of governance, and a credible and sufficiently endowed EFSF war chest for which the ECB is prepared to act as agent. 

The ECB’s primary task remains the preservation of financial and price stability.  Draghi’s introductory statement this month defends the three-year EUR 489 billion refinancing operation last month, asserting that it made “a substantial contribution to improving the funding situation of banks, thereby supporting financing conditions and confidence.”  Draghi maintained that the 3-year operation prevented a more serious credit contraction and reminded us that a second such LTRO is planned for next month.  This action and other non-standard measures do not comprise the basic policy stance, represented in the central bank’s key interest rates, but rather have been invoked to ensure that the intended monetary policy is transmitted properly through financial market channels, which otherwise would be clogged. 

As for the basic monetary stance and possible future changes, Draghi made a number of defining remarks in Q&A. 

  • Inflation has be consistent with the medium-term notion of price stability (i.e., consumer prices rising at a pace below but close to 2.0%). 
  • To meet this target, actual inflation, expected inflation, money and credit developments, and the performance of the real economy are examined, as are any factors that might impact these building blocks.
  • In the environment of high uncertainty, officials must diligently monitor all pertinent developments and cannot pre-announce future actions that might be taken.
  • The present monetary is accommodative and will continue to be so.

Pressed in Q&A about the bank statement’s identification of “tentative signs of stablization in activity at low levels,” Draghi emphasized the word “tentative,” noted that survey rather than hard evidence do this, and would not commit to a view over whether the recession is already winding down.  Indeed, the statement still calls downside risks to growth “substantial,” and infers as it has done for many months that “cost, wage, and price pressures in the euro area should remain modest and inflation rates should develop in line with price stability over the policy-relevant horizon.”  A “moderate underlying pace of monetary expansion” confirms this assessment.

Draghi avoided answering questions about what somebody else might have said or about specific countries, but he indicated deep concern about recent developments by Hungary’s government regarding that country’s central bank.

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



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