A Forex View From Afar

ECB Press Conference Bullet Points

• The Governing Council decided to reduce the interest rate on the main refinancing operations of the Euro system by a further 50 basis points
• Since September 2008 the financial market turmoil has intensified and broadened
• Tensions have increasingly spilled over from the financial sector into the real economy
• Foreign demand for euro area exports has declined, and euro area domestic activity has contracted in the face of weaker demand prospects and tighter financing conditions
• The survey data and monthly indicators for November and December clearly point to a further weakening of economic activity around the turn of the year
• The Governing Council continues to see global economic weakness and very sluggish domestic demand persisting in the coming quarters as the impact of the financial tensions on activity continues
• Outlook for the economy remains surrounded by an exceptionally high degree of uncertainty
• Overall, risks to economic growth remain clearly on the downside
• Annual HICP inflation has declined substantially since the middle of 2008
• The significant decline in headline inflation in the second half of 2008 reflects mainly the sharp falls in global commodity prices over the past few months.
• Lower commodity prices and weakening demand confirm that inflationary pressures in the euro area are diminishing
• Headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid-year. Inflation rates are expected to increase again in the second half of the year
• Risks to price stability over the medium term are broadly balanced
• Unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation
• The latest evidence confirms a moderating rate of monetary expansion in the euro area. Monetary trends therefore support the view that inflationary pressures and risks are diminishing.
• The broad aggregate M3 and, in particular, the components of M3 that are most closely related to the ongoing financial tensions, are stable
• The tightening of financing conditions resulting from the intensification of the financial tensions has contributed to a slowdown in the flow of monetary financial institution loans to the non-financial private sector in recent months
• The Governing Council recalls its operational decision, taken on 18 December 2008, to widen again the corridor formed by the rates on the Euro-system’s standing facilities as of 21 January 2009
• Looking forward, there is an expectation that inflation rates in the euro area will be in line with price stability
• Governing Council welcomes the European Council’s reconfirmation of its full commitment to sustainable public finances

Today’s conference press was probably the most bearish one in the ECB’s short-history. Mr. Trichet acknowledged that inflation pressures had further diminished in the last few moths, and now the Governing Council expects some very low CPI rates in the first part of the year. However, according to the bank’s assessment, this trend should reverse by the middle of 2009. In the Question and Answers session, Mr. Trichet said the Euro-area would not experience deflation, but only very low inflation rates.

The outlook for the economic activity clearly lies on the downside now. Both foreign and internal demands are very weak, affecting the Euro-area’s export market, and thus its trade balance. This trend is seen worldwide, and not only in Europe.
The most important key-points were in the Q&A session, and both were reflected in the market’s reaction. First, Mr. Trichet put a lot of empathy on the March ECB’s meeting, saying that the one in February is not so important, because of the short-time span of only 3 weeks. Shortly after, the euro started to move higher, until later, when Mr. Trichet said that the current rate of 2.00% is definitely not the limit, even though it is a very low rate. The euro started to tumble after this remark.

Also during the Q&A session, the ECB Chairman said that the transmission mechanism between the bank’s decision and the real economy throughout the 3M Libor rate, declined significantly in the near-term. In addition, Mr. Trichet has said that the ECB staff projections are going to be lowered at the March meeting, adapting to the current economic conditions.

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