A Forex View From Afar

ECB Press Conference Analysis

• The Governing Council decided to leave the key ECB interest rates unchanged
• the latest economic data and survey information confirm that the euro area and its major trading partners are undergoing an extended period of significant economic downturn
• external and domestic inflationary pressures are diminishing
• 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 Governing Council will continue to keep inflation expectations firmly anchored in accordance with its definition of price stability
• overall, the level of uncertainty remains exceptionally high
• economic activity throughout the world, including in the euro area, has weakened substantially
• Foreign demand for euro area exports has declined, and domestic factors, notably very low confidence and tight financing conditions, have adversely affected domestic demand. Taken together with other available economic data for the euro area, this points to very negative quarter-on-quarter real GDP growth in the last quarter of 2008.
• continue to see persistent weakness in economic activity in the euro area over the coming quarters
• the very substantial fall in commodity prices seen since the middle of 2008 should support real disposable income, and thus consumption
• the outlook for the economy remains surrounded by an exceptionally high degree of uncertainty
• risks to economic growth remain clearly on the downside
• annual HICP inflation continued to decline in January 2009, falling to 1.1%, according to Eurostat’s flash estimate, from 1.6% in December 2008
• lower commodity prices and the prospect of weak demand confirm our assessment of mid-January 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
• turning to the monetary analysis, the latest evidence confirms a continued deceleration in the underlying pace of monetary expansion in the euro area
• M3 and, in particular, the components of M3 that are most closely related to the ongoing financial tensions – such as holdings of money market funds – have shown high month-to-month volatility of late
• the intensification of financial tensions since September 2008 is leading to significant substitution among the components of M3.
• the flow of MFI loans to the private sector moderated in the course of 2008, largely on account of weakness in loans to households, especially for house purchase
• outstanding MFI loans to non-financial corporations contracted for the first time since the onset of the financial turmoil, confirming the significant weakening of corporate credit at the end of the year after a long period of dynamic growth
• the substantial reduction in key ECB interest rates since October 2008 appears to have been passed through to lower bank lending rates, thereby easing financing conditions for companies and households.
• there are some indications that the pace of tightening of bank credit standards is stabilising, albeit at high levels by historical standards
• the European Commission projects in its January 2009 interim forecast a substantial rise in the average euro area government budget deficit, to 4.0% of GDP this year, from 1.7% in 2008
• this rapid deterioration of the fiscal position is broad-based among euro area countries and is due to the economic downturn
• in 2009 seven euro area countries are currently expected by the Commission to exceed the 3% of GDP reference value for the budget deficit
• it is therefore essential that governments return to a credible commitment to medium-term budgetary objectives as soon as possible.


The ECB press conference continued in the same downbeat tone, as it did in the last meeting. The ECB forecasts are rather poor, saying that the economic downturn might continue over the coming quarter. The euro-area economy is affected by the same credit crunch as its main trading partners. However, Mr. Trichet put a lot empathy in the last few meetings (as in the one held today) that each central bank acts in its own universe, and each of these universes are different in its own way.

As such, the Governing Council had again re-stated its resilience for 0% interest rates, but dodged any question that would demand any other clarification on the 0% benchmark. Currently, there is a debate going on if the ECB is referring to the targeted rate or to the overnight rate, but Mr. Trichet avoided clarifying this issue.

Despite the ECB refuses to adopt a low interest rate, trying to avoid a liquidity trap, Mr. Trichet said the bank adopted a “non-standard quantitative easing” by accepting commercial papers, expanding its balance sheets and by allowing banks to pledge for unlimited funds through its open market operations. The President of the ECB also noted that inflation expectations are different on the two sides of the Atlantic, mainly because the ECB has a quantifiable target, of 2%.

What is more important, Mr. Trichet said is that the current 2% is not the downside limit, and he does not exclude cutting rates again in March. During the press conference the euro had a 60-pip range, but still was not able to break decisively anywhere.

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