ECB Governing Council Decides Against Any Further Stimulus at This Time

March 6, 2014

The central bank of the euro area retained key interest rates, namely a 0.25% refinancing rate flanked by a zero deposit rate and a 0.75% marginal lending rate.  The last change in any of these was made in November when the refi rate and MLR, but not the deposit rate, were cut by 25 bps.  A statement said that incoming information since the February meeting has been largely positive, and more importantly, consistent with the ECB’s views on growth and inflation.

Forward policy guidance was not modified: Officials expect

key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilized capacity and subdued money and credit creation.

New forecasts for growth and inflation were unveiled.  The ECB does this each March, June, September and December, and the March unveiling always introduces one more year in the outlook, 2016 in this case.  The table below shows the new forecasts and earlier projections announced last September and December.  Although the estimated 1.5% average CPI inflation for 2016 constitutes a medium-term result that lies below the target of “below, but close to, 2%, the statement also includes an in-target projection of 1.7% inflation by the final quarter of that year.  Risks to the growth forecast are considered skewed to the downside; those for inflation are called “limited” and “balanced.”  Finally, “a cross-check with the signals from the monetary analysis confirms the picture of subdued underlying price pressures in the euro area over the medium term.”  And what that means is that even after clearer progress occurs in growth and movement toward the inflation target, ECB officials intend to keep the low interest rates and otherwise accommodative policy tools in order to absorb excess slack and strengthen the transmission mechanism of its policy so as to reduce its current fragmented impact on EMU members.

  GDP ’14 GDP ’15 GDP ’16 CPI ’14 CPI ’15 CPI ’16
03/14 1.2% 1.5% 1.8% 1.0% 1.3% 1.5%
12/13 1.1% 1.5%   1.1% 1.3%  
09/13 1.0%     1.3%    

In Draghi’s Q&A, the ECB president gave an extensive answer to refute that the situation in Euroland now is similar to that in Japan in the 1990s that evolved into deflation.  He also reiterated that the euro is a factor to be considered but not a policy target.  He estimated that inflation would be 0.4 percentage points higher now if not for euro appreciation since 2012.  One of the assumptions of the inflation forecasts above is “unchanged exchange rates.”  Another is “declining oil prices.” 

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



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