A Forex View From Afar

ECB press conference

• the Governing Council decided to leave the key ECB interest rates unchanged
• extraordinarily high level of uncertainty stemming from the financial market turmoil
• economic activity in the euro area is weakening, with contracting domestic demand and tighter financing conditions
• the world economy as a whole is feeling the adverse effects of the intensified and prolonged financial market turmoil
• The fall in oil prices from their peak and ongoing growth in emerging market economies might support a gradual recovery in the course of 2009
• outlook is subject to increased downside risks
• financial market tensions affects the real economy more adversely than currently foreseen
• annual HICP inflation has remained considerably above the level consistent with price stability
• wage growth has been picking up rather strongly in recent quarters, in spite of a weaker growth momentum and at a time when labour productivity growth has decelerated
• annual HICP inflation rates are likely to remain well above levels consistent with price stability for some time, moderating gradually during the course of 2009
• upside risks to price stability have diminished somewhat, but they have not disappeared
• strong concern that the emergence of broad-based second-round effects in price and wage-setting behaviour could add significantly to inflationary pressures
• imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability
• previous episodes suggest that financial market tensions can have a relatively limited impact on monetary developments, but they have also been associated with large portfolio shifts and thus have exerted significant influence on monetary data.
• the availability of bank credit has, as yet, not been significantly affected by the ongoing financial tensions
• gradual moderation of growth in loans continued
• the growth of loans to households continues to follow the downward trend
• The Governing Council discussed extensively the recent intensification of the financial market turmoil and its possible impact on economic activity and inflation


The Governing Council discussed for the first time in the last few years the possibility of a rate-cut, along with the option of keeping rates on hold at the current 4.25%. Mr. Trichet put emphasis on price stability, although the risk of inflation has diminished, dragged down by a rather large slowdown in demand.

The effects of the financial turbulence over the real economy are still unknown, since the statistical releases available for the conference were available only up to the month of August; even so, there is an “Exceptional high level of uncertainty“. During the question and answer session, Mr. Trichet underlined that every future action will be decided taking into account price stability.

The financial markets see the ECB cutting at the following meetings. Since the press conference began, the euro tumbled 100 pips against the euro, totaling more than 200 pips today.

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