A Forex View From Afar

Press Conference: Prepare to assure price stability

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• Weak real GDP growth in the second quarter of 2008
• Expectation of moderate ongoing growth
• Domestic and foreign demand are expected to support real GDP growth, albeit to a lesser extent than during 2007
• Growth in the world economy is expected to remain resilient, benefiting from growth in emerging economies
• Fundamentals of the euro area economy remain sound
• Euro area does not suffer from major imbalances
• Employment rates and labor force participation have increased significantly in recent years
• Unemployment rates have fallen to levels not seen for 25 years
• Uncertainty surrounding the outlook for economic activity remains high
• Risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices
• Risks continue for the ongoing financial market tensions to affect the real economy more than anticipated
• Annual HICP inflation has remained well above the level consistent with price stability
• On the basis of current futures prices for these commodities, the HICP is likely to remain well above 2% for quite some time, moderating only gradually in 2009
• Experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than anticipated some months ago
• Risks to price stability for the medium-term horizon remain on the upside and have increased further over the past few months
• Strong concern that price and wage-setting behavior could add to inflationary pressures via broadly based second-round effects
• Imperative to ensure that medium to longer-term inflation expectations remain firmly anchored
• Upside risks to price stability at medium to longer-term horizons
• Sustained underlying strength of monetary and credit expansion has created upside risks to price stability
• Annual M3 growth has remained very vigorous in recent months, supported by the continued strong growth of MFI loans to the private sector
• Monetary analysis clearly confirms the assessment of increasing upside risks to price stability over the medium term
• Very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply
• Risk of countries’ budget deficits coming close to or even exceeding the 3% of GDP reference value has increased

During the ECB press conference we saw the same Trichet, he is ready to counter inflation at any given time. The Governor said that the growth rate in Q2 is expected to slow, in part due to a strong Q1 growth and they should be analyzed together. During the rest of the session, Mr. Trichet re-iterated the same things as in the last conferences: wage-growth to add to inflation, price stability is essential, euro-area fundamentals are safe, and strong money supply will contribute to inflation.

During the Q&A session Mr. Trichet accentuated that the Governing Council has no bias and they are not committed, but are prepared to assure price stability over the medium term. After this sentence was uttered, the euro selling seemed to stop, at least for a while, after loosing more then 150 pips since the session began.

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