ECB Press Conference and Statement Send Bond Yields and Euro Higher

January 10, 2013

The ECB did not change policy, which was the outcome expected by most analysts, but President Draghi’s statement and press conference went further in suggesting that policy may be approaching an inflection point in terms of the balance of risks surrounding the next policy adjustment. 

  • The decision not to cut rates was unanimous.  Unlike December’s meeting, no request for a cut was made or debated.
  • The fragmentation of financial markets, which justified the OMT and other past unconventional measures, has been reduced.  For example, bond yields and peripheral bond spreads have fallen “significantly.”
  • Capital inflows to the Ezone have been strong.
  • Economic recovery is expected to commence later in 2013 (in 2H) based on the accommodative monetary policy stance, stronger global demand, reduced market fragmentation, and significantly improved financial market confidence.
  • Recent economic indicators suggest the downturn is already stabilizing.

Although no alarm was raised about inflation, officials are not blind to the eventuality of exiting from the current stance.  Inflation is projected to drop somewhat below 2% this year, a forecast that is couched within balanced upside and downside risks.  Price expectations are still firmly anchored to the ECB’s definition of price stability, and the monetary analysis confirms a picture of medium-term price stability.  But Draghi signaled that officials anticipate a normalization of funding channels down the road and gave no indication that officials expect further unconventional market support to become necessary. 

Draghi had a few words to say about foreign exchange rates, a topic that he and other central bankers generally avoid.  He noted that the effective euro, that is, its price-adjusted trade-weighted value, is generally aligned with its long-term average, and he underscored the G-20 agreement, to which the ECB was a party, to refrain from competitive depreciation and to endorse the virtue of currency relationships that reflect economic fundamentals.

Given that a segment of analysts and market players were holding out to the possibility of a surprise rate cut or other form of stimulus, financial markets moved during today’s press conference, which struck a more optimistic tone than seen for a while and which unlike earlier ones was characterized by few questions about specific troubled economies.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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