ECB Tightens Commitment to Forward Guidance But Doesn’t Change Key Rates

January 9, 2014

The Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary, which will assist the gradual economic recovery in the euro area. Accordingly, we firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. As previously stated, this expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics. With regard to money market conditions and their potential impact on our monetary policy stance, we are monitoring developments closely and are ready to consider all available instruments. Overall, we remain determined to maintain the high degree of monetary accommodation and to take further decisive action if required.

Stronger language, shown above, was employed in this months Governing Council statement to express policymakers’ determination to do whatever it takes and whatever is allowed by the Treaties creating the monetary union to preserve the euro and to attain the medium-term inflation target of below but close to 2.0%.  At the moment, that isn’t happening, since inflation is below 1.0%, but the forecast remains that after remaining near current levels in coming months, inflation will follow “a gradual upward movement” toward a range consistent with the target.  Risks associated with that price forecast are broadly balanced, but those surrounding a growth forecast for a slow recovery are skewed to the downside. 

The ECB rate structure of a zero deposit rate and a 0.75% marginal lending rate flanking the 0.25% main refinancing rate was not changed, but the statement stresses the readiness of the Governing Council to ease further if needed.  In Q&A, Draghi spelled out two contingencies that could make that happen: an unintended tightening of short-term money market rates and falling expected inflation.  Measures of medium-term price expectations so far continue to align with the central bank’s target.  On money market conditions, the statement calls for a further convergence of market conditions across its eighteen members: “In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed. The forthcoming comprehensive assessment by the ECB will further support this confidence-building process. It will enhance the quality of information available on the condition of banks and result in the identification and implementation of necessary corrective actions. A timely implementation of further steps to establish a banking union will help to restore confidence in the financial system.”

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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