ECB Policy Left Unchanged after October Governing Council Meeting

October 4, 2012

Neither interest rates not unconventional measures were modified at this month’s policy meeting of the ECB Governing Council.  There was no mention of a new LTRO, nor did officials tweak collateral rules or adjust any other terms of existing unconventional measures.  The big initiative from the August and September meetings had been Outright Monetary Transactions, and today’s new statement underscores that the ball for launching such is now strictly in the hands of governments that would use it:

The Governing Council remains firmly committed to preserving the singleness of its monetary policy and to ensuring the proper transmission of the policy stance to the real economy throughout the euro area. OMTs will enable us to provide, under appropriate conditions, a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat again what I have said in past months: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

We are ready to undertake OMTs, once all the prerequisites are in place. As we said last month, the Governing Council will consider entering into OMTs to the extent that they are warranted from a monetary policy perspective as long as program conditionality is fully respected. We would exit from OMTs once their objectives have been achieved or when there is a failure to comply with a program. OMTs would not take place while a given program is under review and would resume after the review period once program compliance has been assured.

On July 5, the Council cut its refinancing rate by 25 basis points to 0.75%, which resulted in cuts as well to the marginal lending rate to 1.50% and to the deposit rate to zero.  To cut the refinancing rate any further would probably entail going to a negative deposit rate, and the Council as at meetings in August and September was not prepared at this time to take that unchartered step.  In Q&A, Pdt Draghi said officials had not discussed a rate cut at today’s meeting, which was held away from the Frankfurt headquarters in Slovenia. 

The economic and price outlooks were not changed, and the monetary analysis was essentially the same as before.  Growth in the euro area is “expected to remain weak,” with risks skewed to the downside.  Inflation is projected to stay above 2.0% for the rest of 2012, “but then to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon.”  Expected inflation continues to be “firmly anchored” and consistent with what officials construe to be medium term price stability, and risks to the inflation forecasts are evenly balanced around the baseline forecast.  Analysis of money and credit growth found such dynamics to be subdued and supporting the likelihood of successful delivery of price stability down the road.

Many of the questions in Q&A understandably were Slovenia specific.  Regarding other countries, Draghi applauded progress in Portugal in the realm of needed reforms and refused to say if the current level of Spanish bonds is appropriate.  He did underscore the fragmented nature of financial markets in the euro area and pointed to such as proof that mechanisms are still not functioning properly for transmitting a single monetary policy throughout the union.  This is the justification for OMTs and other unconventional measures. 

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

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