ECB Preview

April 3, 2012

Because of the upcoming Good Friday/Easter Monday holidays, the ECB monthly meeting is being held Wednesday instead of on the usual first Thursday of the month.  The rate decision, to be announced tomorrow at 11:45 GMT, will confirm universal expectations of no change in the 1.0% refinancing rate.  Likewise, the Governing Council’s statement is unlikely to contain any market-moving surprises. 

Quarterly macroeconomic forecasts were released only a month ago and have not been discredited in any substantial way.  The new 2012 GDP growth range midpoint was minus 0.1% (revised downward from +0.3% in December’s projection).  The mid-range of the CPI estimate was 2.4% in 2012 and 1.6% in 2013.  GDP risks were skewed to the downside because of the possibility of commodity price pressures and an intensification of euro debt tensions.  The March ECB statement spoke of “signs of stabilization” in the economic downturn, but March PMIs cast some doubt on whether that is happening, so policymakers will have no choice but to talk of weak growth prospects that in addition are subject to downside risks.  And even though inflation has been above the 1.9% target ceiling in the euro area since January 2011, stable inflation expectations and considerable slack in the labor market and capacity usage justify the view that inflation will be “in line with price stability over the policy-relevant horizon.”  On-year growth of 0.7% in bank lending to the private sector, subdivided into 0.4% growth in loans to non-financial firms and 1.2% in loans to households, adds a distinctly disinflationary touch.

As often is the case, President Draghi’s press conference starting at 12:30 GMT holds the most suspense, and there the focus of questioning is apt to turn to the ECB’s non-standard measures undertaken to promote market functionality.  It has already been signaled that the December and February LTROs more or less reached the limit of assistance the ECB is prepared to deliver and that the task of enabling growth to deepen now rests with government fiscal policies and other structural and regulatory reforms.  Some restless monetary policymakers have even begun to mumble about fashioning a exit strategy from the unconventional stimulus.  In that regard, the ECB is in the same predicament as the Bank of Japan and Fed.  Mopping up liquidity can only be attempted when doing so doesn’t pose undue risk to economic growth, and that point still lies far away.  So it is one thing to reassure markets that the tools exist and will be used to end unconventional stimulus when the time for that comes, and something quite different to declare that such a time has arrived.  Those market players who have failed to understand that distinction might be disappointed by the press conference.

Note that the Bank of England’s Monetary Policy Committee will be announcing its rate decision on Thursday as is usual.

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



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