European Central Bank Offers Nothing New this Time

August 7, 2014

Draghi’s written statement, released after the Governing Council’s decision to leave its refinancing, marginal lending and deposit rates at 0.15%, 0.40% and negative 0.10%, reads very similarly to the July statement.  Officials continue to project “moderate and uneven recovery, with low rates of inflation and subdued monetary and credit dynamics.”  Expected inflation hasn’t moved and still lies well above actual recent inflation, consistent with the target of “below but close to 2.0%.”  Rate cuts made in June resulted in easier monetary conditions, and planned 4-year LTROs will be providing additional stimulus.  Further policy stimulus is not ruled out, but for now the Council is waiting to assess the impact of its recent steps.  Rates will go no higher than current levels for an “extended period of time.”  In Q&A, Draghi conceded some recent loss of growth momentum, and said that growth risks are skewed to the downside because of geopolitical dangers and other factors that have been also mentioned in the past.  The latest downtick of inflation to 0.4% was ascribed to lower energy prices, while other elements of inflation have been static.  Price risks, despite the deceleration to 0.4% in July 2014 from 1.6% in July 2013, are still characterized as “balanced.”  Draghi’s coy remarks in Q&A about “preparatory work related to outright purchases in the asset-backed securities market” suggest an element of bluff, just as has been the case with the OMT program, which as yet has never been actually utilized. 

The Governing Council’s strategy from a stylistic and substantive standpoint seems to be a recipe for perpetuating very sloppy growth that will keep the Ezone economy one shock away from an enduring slide into mild deflation.  Comparisons to what befell Japan will be encouraged in this environment.

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



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