ECB Eases in May

May 3, 2013

The ECB cut an interest rate for the first time in ten months.

On May 2, the refinancing rate was cut to 0.50% from 0.75%, but the deposit rate was left at zero percent.  Fixed rate unlimited MROs were extended to continue through July 2014, and a 3-month LTRO was announced.  In President Draghi’s introductory statement, the move was justified by lower inflation, extended recession into the first quarter of 2013, and the weakness of money and credit growth.  The press conference Q&A revealed that the decision was taken by consensus but wasn’t necessarily unanimous.  Draghi rejected criticisms that the ECB has been too timid and too late and is isolated in its continuing stand in favor of fiscal consolidation.  He reaffirmed the reasons for acting this month, asserting

The Governing Council has taken this decision consistent with the low price pressure over the medium term. As I said in the introductory statement, HICP inflation has gone down considerably. Even if you look at HICP inflation without food and energy prices, it has still gone down, but less markedly. Inflation expectations are well anchored in the medium term. As I have said, monetary and credit development have been subdued. Weakness in the fourth quarter of 2012 extended into the first part of this year. So, all in all, the Governing Council decided to go for a cut of 25 basis points, accompanied, however, and I would ask you not to underestimate the importance of the other measure, by maintaining the fixed rate full allotment policy until at least mid next year. The combination of the two measures is especially important and we can discuss this in the upcoming questions. At the same time, and this answers the last part of your question, we will certainly look at all the incoming data and carefully monitor developments. As I said last time, we stand ready to act if needed.

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

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