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ECB Press Conference Analysis

At the ECB press conference, held after the announcement to hold the minimum bid rate at 1%, as expected, Mr. Trichet re-iterated on Thursday the same messages as in the last few press conferences. The euro-area economy is going through a contraction period, which is likely to continue for the time being, and interest rates are poised to remain at very low levels, until the expected gradual recovery starts to threaten the inflation target.

However, there were some small differences from the past press conferences, like the fact that the risk to the economic outlook is balanced, which represents a major upgrade from the comments in the past few meetings. Remaining on the same tone, the ECB gauges the outlook for inflation as balanced too, suggesting that for now, neither inflation nor deflation are major concerns.

In addition, Mr. Trichet announced that the bank will begin its asset buying program in the next few days. The ECB is set to buy up to 60 billion euros in covered bonds, something that may help re-launch the European mortgage market. Last week, the ECB ran the biggest open market operation on record, by pumping 442.2bn euros into the financial system, at a fixed 1% interest rate with a maturity of one year. TheLFB-Forex.com Trade Team calls this a real bargain, which should replenish most European banks confidence and balance sheet levels.

• The Governing Council decided to leave the key ECB interest rates unchanged
• The current rates remain appropriate taking into account all the information and analyses that have become available
• Economic activity over the remainder of this year is expected to remain weak
• Looking ahead into next year, after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected by mid-2010
• The risks to the economic outlook are balanced
• There may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided
• Concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets
• Annual HICP inflation was -0.1 % in June
• Further decline in annual rates of inflation was anticipated and reflects primarily base effects resulting from past sharp swings in global commodity prices.
• Annual inflation rates are projected to remain temporarily in negative territory over the coming months, before turning positive again
• Risks to the outlook for inflation are broadly balanced
• On the downside they relate, in particular, to the outlook for economic activity, while on the upside they relate to higher than expected commodity prices
• In May, the annual growth rate of M3 declined further to 3.7%, with that of loans to the private sector falling further to 1.8%
• This concurrent deceleration supports the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term
• The flow of bank loans to non-financial corporations and households has remained subdued, reflecting in part the weakening in economic activity and the continued low levels of business and consumer confidence
• In this respect, it is important to note that past reductions in key ECB rates have continued to be passed on through lending rates to both non-financial corporations and households
• Banks should take appropriate measures to strengthen further their capital bases
• As the transmission of monetary policy works with lags, our policy action should progressively feed through to the economy in full
• Hence, with all the measures taken, monetary policy will provide ongoing support for households and corporations.
• The Governing Council would like to recall that the Eurosystem provided a significant amount of liquidity to euro area banks at its recent first 12-month longer-term refinancing operation
• Once the macroeconomic environment improves, the Governing Council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed

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