ECB Seeks More Information before Taking Any Action

February 6, 2014

The European Central Bank Governing Council did not ease policy as some market players were expecting and others hoping.  It did not back away from its macroeconomic outlook and its forward guidance.

  • Officials expect “a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on.  The “broad-based weakness of the economy and subdued monetary dynamics” underlie the macro view.
  • Officials expect “the key ECB interest rates to remain at present or lower levels for an extended period of time.”  We “are ready to consider all available instruments and remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required.”

The ECB did not consider information at this time to be sufficiently complete and clear.  They will be much better able to reach a decision when they meet a month from now because

  • It will be easier to assess if the volatility and weakness being experienced by emerging markets is going to be temporary or enduring and how broadly based the problem is. 
  • Updated staff macroeconomic forecasts including, for the first time forecasts through 2016, will be available.  Policy is guided by what is perceived likely in the medium term, so having concrete forecasts of 2016 is very important.
  • Weak bank lending recently appears to have been influenced by the bank asset review.  January money and credit data will give an indication of how significant that distortion was.  There is hope that monetary dynamics, though subdued, could be stabilizing.

An important change in today’s statement was the shift from calling underlying price pressures “subdued” as in the December statement to “weak.”  By doing so, the ECB put markets on notice that some form of stimulus to be unveiled next month is very much likely under consideration.  But the delay of action in spite of a further dip in inflation to 0.7% reveals an ambivalence on the 24-person Council and will perpetuate the impression that in the fraternity of major central banks the ECB is more likely than others to drag its feet when it comes to doing whatever it takes to avoid deflation rather than simply speaking about that intention. 

The euro, which was trading as low as $1.3482 overnight and at $1.352 shortly before the ECB policy announcement, has now strengthened as high as $1.3620.

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

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