ECB Review

July 5, 2012

As expected, the ECB reduced interest rates today.  Not only were the refinancing rate and marginal lending rate cut respectively to a new record lows of 0.75% from 1.0% and 1.5% from 1.75%, but the Governing Council also took the once distained step of slashing the deposit rate to zero from 0.25%.  The Bank of England didn’t go that far, and the Fed has used a range of zero to 0.25% rather than a target of 0.0%.  Today’s action constitutes the first ECB rate cut of 2012.  Reductions of 25 basis points were done in November 2011 and again in the final month of last year.

A statement from President Draghi speaks of a “renewed weakening of economic growth” and “heightened uncertainty weighing on confidence and sentiment,” not just in selected countries of the euro area but, unlike a month ago, in the whole region.  CPI inflation of 2.4% remains above target but is expected to decline further over the rest of 2012 and to “be again below 2% in 2013.”  Officials have not abandoned the forecast of a slow but gradual economic recovery beginning late this year based on the following factors: low nominal interest rates, negative real interest rates, an abatement of the regional debt crisis  accompanied but improved sentiment, and stabilizing global demand.  However, Draghi said the downside risks to that baseline view are greater now than before.  Price risks remain balanced.  Medium-term inflation expectations remain well-anchored around the ECB target, and the analysis of money and credit growth trends confirms the “economic analysis that price developments should remain in line with price stability over the medium term.”

Today’s interest rate decision was unanimous.  Officials were also unanimous in not seeking further immediate non-standard measures beyond the June 22 announced expansion of collateral terms.  There is some disappointment that the two multi-year LTROs haven’t so far stimulated bank lending more discernibly, and that is so in large part because of weak credit demand.

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



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