Dissection - The European Central Bank Press Conference
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DISSECTION - THE EUROPEAN CENTRAL BANK PRESS CONFERENCE
THE TD TAKE
January 15, 2009
December 4, 2008
November 6, 2008
The ECB's 50bps cut will be the last until at least March, and we believe likely until the April-June period. The GC's expectation for the second month in a row is that inflation will be within the confines of price stability over the medium-term, but now feels the risks around that assessment are balanced. If low energy prices fail to stimulate consumers, or oil approaches $30p, the ECB will move to cut. If oil should rise above $40pb or the economy prove resilient, this may be a long pause.
The ECB cut by an aggressive 75bps as we expected, but is downshifting. The risks to price stability are "more balanced," and with the past cuts and downgraded staff forecasts, inflation rates are now expected to be within the ECB's medium-term target. Q&A also highlighted the GC's decision was a "consensus," but not "unanimous" as is the norm, and we assume the dissent was for less. We believe the ECB is still optimistic on the medium-term, but the choice next month looks to be between 25bps (likely) or no change (reverting to cuts every other month), with only a slight risk for 50bps if market and economic developments in the next month are atrocious.
The ECB cutes rates by 100bps in one month's time and doesn't appear to be done yet. The remaining upside inflation risk (the chance of commodity price increases) is balanced with even weaker economic profile and now a risk of a significant inflation undershoot. The ECB decision next month will revolve around cutting 50bps or 75bps.
...very sluggish domestic demand persisting in the coming quarters...At the same time, we expect the fall in commodity prices to support real disposable income in the period ahead…
...we see global economic weakness and very sluggish domestic demand persisting in the next few quarters...a subsequent recovery should then gradually take place...
...sluggish domestic and external demand…
Overall, risks to economic growth remain clearly on the downside.
...both global demand and euro area demand are likely to be dampened for a protracted period of time…Risks to economic growth lie on the downside.
...the latest survey data confirm that momentum in economic activity has weakened significantly ...The intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time.
Owing mainly to base effects...headline annual inflation rates are projected to decline further in the coming months…[but then] are expected to increase again in the second half of the year….Such short-term volatility is, however, not relevant.
...lower commodity prices and weakening demand lead us to conclude that inflationary pressures are diminishing further…
...taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate.
...the considerable easing in global commodity prices over the past few months, which more than offsets the impact of the sharp rise in unit labour costs in the first half of this year…
...strong wage growth in the first half of the year…
...while the underlying pace of monetary expansion has remained strong, it has continued to decelerate further…Monetary trends therefore support the view that inflationary pressures are diminishing further, with some risks remaining on the upside in the medium to longer term...a continued moderation of the growth rate of loans to the non-financial private sector...
...the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration...annual growth rates of broad money and credit aggregates, while still remaining strong, continued to decline in September…some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit...
REAL ACTIVITY Consumer
Investment ECB Assessment
INFLATION Non-labour prices
Wages
Credit
Monetary trends...support the view that inflationary pressures and risks are diminishing…More data and further analysis are necessary to form a robust judgement about the severity and scope of credit constraints and their possible implications for economic activity.
Expectations
…[ECB expectation of price stability] supported by available indicators of inflation expectations for the medium term.
ECB Assessment
…inflationary pressures in the euro area are diminishing...Risks to price stability over the medium term are broadly balanced.
…risks to price stability at the policy-relevant horizon are more balanced than in the past…
...a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely.
Balance of Risks
...we continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon…
...the evidence that inflationary pressures are diminishing further has increased and, looking forward, inflation rates are expected to be in line with price stability over the policy-relevant horizon…a faster decline in HICP inflation cannot be excluded around the middle of next year, mainly due to base effects. However, also due to base effects, inflation rates could increase again in the second half of the year ...
The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009…The remaining upside risks relate to an unexpected increase in commodity prices…some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year...
ECB Assessment
After today’s decision we consider risks to price stability over the mediumterm to be broadly balanced.
The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective.
The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective.
Decision
50bps cut to 2.00%
75bps cut to 2.50%
50bps cut to 3.25% (following inter-meeting 50bps cut to 3.75% on October 8)
The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective.
MPC REASONING
Link to text http://www.ecb.int/press/pressconf/2009/html/is090115.en.html RICHARD KELLY ● SENIOR ECONOMIST ● 416-982-2559
http://www.ecb.int/press/pressconf/2008/html/is081204.en.html Link to text
Link to text http://www.ecb.int/press/pressconf/2008/html/is081106.en.html
THE TD TAKE
January 15, 2009
December 4, 2008
November 6, 2008
The ECB's 50bps cut will be the last until at least March, and we believe likely until the April-June period. The GC's expectation for the second month in a row is that inflation will be within the confines of price stability over the medium-term, but now feels the risks around that assessment are balanced. If low energy prices fail to stimulate consumers, or oil approaches $30p, the ECB will move to cut. If oil should rise above $40pb or the economy prove resilient, this may be a long pause.
The ECB cut by an aggressive 75bps as we expected, but is downshifting. The risks to price stability are "more balanced," and with the past cuts and downgraded staff forecasts, inflation rates are now expected to be within the ECB's medium-term target. Q&A also highlighted the GC's decision was a "consensus," but not "unanimous" as is the norm, and we assume the dissent was for less. We believe the ECB is still optimistic on the medium-term, but the choice next month looks to be between 25bps (likely) or no change (reverting to cuts every other month), with only a slight risk for 50bps if market and economic developments in the next month are atrocious.
The ECB cutes rates by 100bps in one month's time and doesn't appear to be done yet. The remaining upside inflation risk (the chance of commodity price increases) is balanced with even weaker economic profile and now a risk of a significant inflation undershoot. The ECB decision next month will revolve around cutting 50bps or 75bps.
...very sluggish domestic demand persisting in the coming quarters...At the same time, we expect the fall in commodity prices to support real disposable income in the period ahead…
...we see global economic weakness and very sluggish domestic demand persisting in the next few quarters...a subsequent recovery should then gradually take place...
...sluggish domestic and external demand…
Overall, risks to economic growth remain clearly on the downside.
...both global demand and euro area demand are likely to be dampened for a protracted period of time…Risks to economic growth lie on the downside.
...the latest survey data confirm that momentum in economic activity has weakened significantly ...The intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time.
Owing mainly to base effects...headline annual inflation rates are projected to decline further in the coming months…[but then] are expected to increase again in the second half of the year….Such short-term volatility is, however, not relevant.
...lower commodity prices and weakening demand lead us to conclude that inflationary pressures are diminishing further…
...taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate.
...the considerable easing in global commodity prices over the past few months, which more than offsets the impact of the sharp rise in unit labour costs in the first half of this year…
...strong wage growth in the first half of the year…
...while the underlying pace of monetary expansion has remained strong, it has continued to decelerate further…Monetary trends therefore support the view that inflationary pressures are diminishing further, with some risks remaining on the upside in the medium to longer term...a continued moderation of the growth rate of loans to the non-financial private sector...
...the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration...annual growth rates of broad money and credit aggregates, while still remaining strong, continued to decline in September…some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit...
REAL ACTIVITY Consumer
Investment ECB Assessment
INFLATION Non-labour prices
Wages
Credit
Monetary trends...support the view that inflationary pressures and risks are diminishing…More data and further analysis are necessary to form a robust judgement about the severity and scope of credit constraints and their possible implications for economic activity.
Expectations
…[ECB expectation of price stability] supported by available indicators of inflation expectations for the medium term.
ECB Assessment
…inflationary pressures in the euro area are diminishing...Risks to price stability over the medium term are broadly balanced.
…risks to price stability at the policy-relevant horizon are more balanced than in the past…
...a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely.
Balance of Risks
...we continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon…
...the evidence that inflationary pressures are diminishing further has increased and, looking forward, inflation rates are expected to be in line with price stability over the policy-relevant horizon…a faster decline in HICP inflation cannot be excluded around the middle of next year, mainly due to base effects. However, also due to base effects, inflation rates could increase again in the second half of the year ...
The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009…The remaining upside risks relate to an unexpected increase in commodity prices…some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year...
ECB Assessment
After today’s decision we consider risks to price stability over the mediumterm to be broadly balanced.
The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective.
The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective.
Decision
50bps cut to 2.00%
75bps cut to 2.50%
50bps cut to 3.25% (following inter-meeting 50bps cut to 3.75% on October 8)
The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective.
MPC REASONING
Link to text http://www.ecb.int/press/pressconf/2009/html/is090115.en.html RICHARD KELLY ● SENIOR ECONOMIST ● 416-982-2559
http://www.ecb.int/press/pressconf/2008/html/is081204.en.html Link to text
Link to text http://www.ecb.int/press/pressconf/2008/html/is081106.en.html
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