A Forex View From Afar

The Press Conference Bullet Points And Analysis

• The Governing Council decided to reduce the key ECB interest rates by a further 25 basis points
• Today’s decision takes into account the expectation that price pressures will remain subdued
• The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn
• Economic activity has weakened markedly in the euro area, as domestic demand has contracted in parallel with the downturn in the world economy
• Available data and survey indicators suggest that economic activity in the euro area has remained very weak in early 2009. It is likely to remain very subdued for the remainder of the year
• There may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken
• On the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy
• Annual HICP inflation has fallen further, from 1.2% in February to 0.6% in March
• The decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period
• We expect to see headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid-year. Such short-term movements are, however, not relevant from a monetary policy perspective.
• Annual HICP inflation is expected to remain below 2% in 2010
• Available indicators of inflation expectations over the medium to longer term remain firmly anchored
• The latest data confirm the high month-to-month volatility of developments in M3 and its components observed since the intensification of the financial turmoil
• The pace of monetary expansion in the euro area has continued to decelerate markedly
• Developments within M3 clearly reflect market participants’ specific investment responses to the intensification of the financial turmoil
• The flow of MFI loans to non-financial corporations and households has remained very subdued
• The decline in short-term lending may be indicative of a reduction in loan demand related to the weakening of economic activity.
• Regarding fiscal policies, it is necessary that countries’ commitments to a path of consolidation in order to return to sound fiscal positions are credible, respecting fully the provisions of the Stability and Growth Pact
• This is essential to maintain the public’s trust in the sustainability of public finances, which is important both for the economy to recover and for supporting long-term growth
• Many countries will need to specify further credible consolidation measures for 2010 and beyond


The questions and answers section took off with Mr. Trichet appearing very casual and relax, speaking about the future monetary policies. The Chairman of the ECB said that the present 1.25% is not the floor and does not exclude sending the key interest rate any lower.

At the same time, Mr. Trichet outlined that the deposit rate, which is currently sitting at the 0.25% will not be reduced any more. This implies that the monetary channel between the three main interest rates (deposit, key and lending) will shrink at the following meetings. Even though it did not explicit specify the decision that backed the 0.25% interest rate, Mr. Trichet said that the decision was taken unanimously.

Unlike at the other press conference, Mr. Trichet referred to the Fed, by saying that the money rates in the Euro-area are lower than in the U.S., despite the interest rate spread. Mr. Trichet also said that currently, the ECB’s balance sheet is larger than the Fed’s when compared with the GDP size. Most likely, these comments came as the ECB received strong criticism for not doing more to fight the credit crisis.

Most market participants expected the ECB to announce a new quantitative easing policy today, probably a possible intervention in the corporate debt market. However, Mr. Trichet said that full details would be disclosed at the next meeting, which will be held in 7 May. Additionally, Mr. Trichet put a lot of empathy on the fact that the bank is already in a non-standard method, being the first central bank that adopted quantitative easing methods by providing unlimited funds to banks.

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