A Forex View From Afar

ECB Press Conference Bullet Points And Analysis

• the Governing Council decided to reduce the key ECB interest rates further by 50 basis points, following the previous coordinated interest rate cut on 8 October 2008
• high degree of uncertainty in large part stemming from the intensification and broadening of the financial market turmoil.
• The world economy is feeling the adverse effects, as tensions increasingly spill over from the financial sector to the real economy and from advanced economies to emerging market economies
• activity has weakened significantly, with sluggish domestic and external demand and tighter financing conditions
• important that the banking sector takes fully into account the significant support measures adopted by governments to deal with the financial turmoil
• These measures should be supporting trust in the financial system and should help to prevent undue constraints in credit supply
• downside risks to economic activity identified earlier have materialized, particularly those stemming from the financial market tensions
• HICP has been steadily declining since July
• high level of inflation is largely due to both the direct and indirect effects of past surges in energy and food prices at the global level
• significant increase in unit labor cost.
• sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009.
• some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year. These movements would be short-lived and therefore not relevant from a monetary policy perspective
• growth rates of broad money and credit aggregates, while still remaining strong, continued to decline in September.
• upside risks to price stability are diminishing but that they have not disappeared completely.
• financial tensions has already had an identifiable impact, particularly in the form of outflows from money market funds and greater inflows into overnight deposits
• the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations
• intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time


Mr. Trichet appeared more bearish than usual over the Euro-area economy, especially as the financial crisis is affecting the real economy. In the bank’s words, the HICP is expected to come down in the following period, although Mr. Trichet had avoided calling a deflationary period. Furthermore, he suggested that some periodical, “strong downside movements in HICP” may appear in the following period, but this will not be relevant due to its short-term span.

In the Q&A section, Mr. Trichet said the Governing Council had to choose between a 50 and 75 basis points cut, but the final decision was “unanimously” to cut rates by 50 basis points, in order to assure price stability. When asked about the future interest rate decisions, the ECB Chairman said they are never pre-committed, even though later he added “we won’t exclude we can cut again”.

Both in the speech and in the question and answers session, Mr. Trichet put a lot of empathy on the banking sector, saying that “banks have to live up to their consequences” and that “banking sector takes fully into account the significant support measures adopted by governments”. Another issue addressed by the Chairman of the ECB was that banks do not set the rate cuts to the real economy, and instead of using the excessive funds in the money-markets, sending the Libor rates lower, banks place the excessive funds at the ECB’s deposit facility. Most likely, the central bank will make a decision in the following weeks to solve this problem.

As for now, futures markets are pricing in at least a 25 basis points rate cut next month. In the currency market, the Euro recovered during the speech most of the ground loss during the interest rate decision. In the last months, the euro had lost approximately 20% from the top reached in July.

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