ECB Discussed but Didn’t Cut Interest Rates

December 6, 2012

The ECB’s refinancing rate was left unchanged as expected at 0.75% and will continue to be flanked by a zero deposit rate and a 1.5% marginal lending rate.  This was the decision that analysts were expecting.  Rates have been at these levels since a reduction at the monthly meeting in early July.  Pdt in Q&A noted that the Governing Council discussed further easing but ultimately chose the status quo. 

New quarterly growth and inflation forecasts were unveiled. Projected growth in 2013 was revised downward rather sharply to a midpoint of minus 0.3% from +0.5% in the forecast made in September.  The forecast horizon was extended out a year to 2014, and the first projected midpoint for that year is growth of +1.0% compared to an initial 1.3% predicted a year ago for 2013.  Draghi characterized the medium-term growth outlook as largely the same as before.  A regional recession continued in the final quarter of 2012.  Officials now believe that it will carry over into early 2013 but retain the view that a gradual recovery will emerge later next year, powered by better export demand, “our accommodative monetary policy stance and significantly improved financial market confidence.”  The risks surrounding the baseline growth forecast continue to be skewed to the downside.  The evolution of the ECB’s forecasts are shown below.

  GDP 2012 GDP 2013 GDP 2014 CPI 2012 CPI 2013 CPI 2014
12/12 -0.6%/-0.4% -0.9%/0.3% +0.2/2.2% +2.5% +1.1%/2.1% +0.6%/2.2%
09/12 -0.6%/-0.2% -0.4%/1.4%   +2.4%/2.6% +1.3/2.5%  
06/12 -0.5%/+0.3% 0.0%/2.0%   +2.3%/2.5% +1.0%/2.2%  
03/12 -0.5%/+0.3% 0.0%/2.2%   +2.1%/2.7% +0.9%/2.3%  
12/11 -0.4/+1.0% +0.3/2.3%   +1.5/2.5% +0.8/2.2%  
09/11 +0.4/2.2%     +1.2/2.2%    
06/11 +0.6/2.8%     +1.1/2.3%    
03/11 +0.8/2.8%     +1.0/2.4%    
12/10 +0.6/2.8%     +0.7/2.3%    

Projected CPI inflation has also been revised downward.  Officials have penciled in a 1.6% inflation midpoint next year and 1.4% in 2014.  These are certainly below 2.0% and arguably not close enough to that level to be fully consistent with price stability.  Expected inflation remains firmly anchored and consistent with “below but close to 2.0%.”  The Council’s monetary analysis found money expansion to be subdued and lending growth to be even lower; both corroborate the likelihood of price stability in the medium term.  While the risks to inflation are assessed to be broadly balanced, the new baseline view is unlikely to impede a decision to cut rates in the view, if growth develops on the low side or below what officials are presently assuming.  For now, at least some Council members seem to be leaning toward further monetary stimulus, but they are not enough in number to shake the consensus of the whole group that the present policy stance is adequate.

No surprises or new initiatives were announced in non-standard measures.  The main refinancing operations will continue as before at least through mid-2013.

Nor did the press conference provide other market-moving revelations.  Draghi credited the OMT program with helping regional bond yields to settle back but stuck to the prior spin that now that the program’s conditions are set, it will be up to recipient governments whether the facility is used.  Not surprisingly, Draghi’s statement endorsed strongly the goal of “a single supervisory mechanism (SSM)” to oversee banks, calling such a main building block toward “re-integrating the banking system.”

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

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