European Central Bank: No Change

October 2, 2013

The monthly meeting of the ECB Governing Council was held in Paris this month and on the first Wednesday, rather than first Thursday of the month because of a German holiday tomorrow.

Council members engaged in a discussion of whether to reduce interest rates but by consensus majority elected again not to do so.  A 0.5% refinancing rate continues to be flanked by a zero deposit rate and a marginal lending rate (MLR) of 1.0%.  The last cut in the refinancing rate was made in May when such was sliced by 25 basis points.  At the same time the MLR was cut by 50 bps, but the deposit rate was not changed.

President Draghi’s introductory statement didn’t break new ground.  The statement confirms that “price developments should remain subdued and in line with price stability over the medium term.”  Economic activity is forecast to recover gradually, although industrial production appears to have slowed at the start of 3Q, and growth risks such as ongoing balance sheet adjustments and elevated unemployment remain skewed to the downside.  Price risks are considered balanced. 

The statement retains an element of forward guidance, first introduced early in the summer.

Looking ahead, 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.

In Q&A, Draghi was asked more than once about the elevation of the euro and the very low current 1.1% on-year rate of CPI price inflation.  In reply, he noted that the euro exerts important influence over growth and inflation and, though not an explicit target, is one of the factors that can influence policymaking.  He said that the recent very low inflation pace was anticipated by officials and that while such levels will continue for a while and into the medium term, they are not expected to become permanent.  The message appears that both low inflation and euro strength, which reinforce one another, are being monitored and may prompt additional policy stimulus down the road.

On what the ECB may or may not invoke, Draghi asserted that no policy options have been excluded.  Whatever seems appropriate will be utilized.  But for now, there is satisfaction with the status quo.

On other matters, Draghi

  • Promised not to let too little liquidity squelch the nascent recovery but added that a lack of bank capital mustn’t be mistaken for deficient liquidity.
  • Asserted that the fragmentation of financing conditions around the Ezone needs to decline further.
  • Indicated that a protracted shutdown of the U.S. economy would pose a problem to U.S. and world growth, but the operative word is protracted.
  • Added that he isn’t expecting the U.S. to default.
  • Once again admonished against countries slackening efforts to reduce deficits.  Debt ratios must fall.
  • Reiterated calls for structural reforms in product and labor markets to enhance competitiveness and rebalance Ezone growth.

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

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