September 5, 2013

The ECB Council discussed but did not cut interest rates, which are at zero for deposits and 0.5% for refinancing.  President Draghi’s introductory statement at the press conference was very similar to the one at the August 1 press conference.  Recovery has arrived but Draghi was very guarded in calling the upturn very green and thus short of true escape velocity.  Inflation is projected to remain subdued, and price expectations are firmly anchored.  No conflict exists in conclusions drawn from economic analysis and monetary analysis.  Forward policy guidance remained vague:

Our monetary policy stance will remain accommodative for as long as necessary, in line with the forward guidance provided in July. The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an unchanged overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the economy and subdued monetary dynamics.

The ECB staff’s growth and inflation forecasts were updated, as is the quarterly custom.  Modifications this time were insignificant.  Growth next year could be as weak as zero, implying a relapse into recession for part of the time, and no stronger than 2.0%.  The mid-range for projected inflation remains marginally lower next year at 1.3% than in 2013 and well below the ECB’s target of “close but below 2.0%.”  The evolution of the staff’s forecasts are given below.

Released GDP 2013 GDP 2014 CPI 2013 CPI 2014
09/13 -0.6%/-0.2% 0.0%/2.0% +1.4%/1.6% +0.7%/1.9%
06/13 -1.0%/-0.2% 0.0%/2.2% +1.3%/1.5% +0.7%/1.9%
03/13 -0.9%/-0.1% 0.0%/2.0% +1.2%/2.1% +0.6%/2.0%
12/12 -0.9%/0.3% +0.2/2.2% +1.1%/2.1% +0.6%/2.2%
09/12 -0.4%/1.4%   +1.3%/2.5%  
06/12 0.0%/2.0%   +1.0%/2.2%  
03/12 0.0%/2.2%   +0.9%/2.3%  
12/11 +0.3/2.3%   +0.8%/2.2%  

Reporters at the press conference tried to get Draghi to clarify how the ECB feels about the rise in market interest rates at both the long and short end.  It’s something that officials are watching, but the ECB President wouldn’t call moves thus far excessive.  The only concession was a readiness to respond if such a conclusion were to be reached.  Nor would Draghi characterize market liquidity as deficient in the wake of diminished outstanding LTROs. 

Draghi, in short, was as cautious about revealing how the ECB Council’s consensus might be evolving and possible application of the forward rate guidance to actual future policy as he was about the strength of Euroland’s economy.  A compelling reason not to pre-commit overly is not knowing exactly what the FOMC will unveil later this month and, more importantly, what markets will conclude about future U.S. policy from Chairman Bernanke’s press conference. 

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



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