Recent Notable Quotes
ECB President Trichet (France): Today's market rates "are conducive to growth and job creation." (29-Apr-04)
ECB Vice President Papademos (Greece): "In the Euro-area, available economic data for the first or four months, as well as information from other indicators, has been sending us mixed signals." (29-Apr-04)
ECB Chief Economist Issing (Germany): Regarding oil prices, "this is a threat to growth in the world economy. At the same time, we see that the strong Euro has protected the Euroarea to some extent." (29-Apr-04)
ECB council member Liebscher (Austria): "In coming months, certain short-term price developments could lead to inflation of close to 2 percent or above. On the other hand, that doesn't change our outlook for 2004 and next year, which still sees inflation below 2 percent." "Oil prices are a major [risk] factor" to prices. "All recent indications confirm that global economic growth in 2004 will be robust and broadly based across different regions of the world. On the domestic side, the conditions for a reovery in private demand are in place and there have been signs over recent months of a pickup in investment." (29-Apr-04)
ECB Vice President Papademos (Greece): "Monetary policy cannot be expected to increase economic growth sustainably by tolerating higher inflation." (28-Apr-04)
ECB President Trichet (France): Rising oil prices are "highly unwelcome for both inflation and growth, ... but I have confidence in our ability to weather this shock." "In the short term we are expecting a hump in inflation because of base effects. This hump does not affect our medium and long-term analysis of price stability." (23-Apr-04 Financial Times)
Bundesbank/ECB nominee Weber (Germany): "The environment hasn't changed" since the panel of economic advisors known as the 'Five Wise Men' (of which he is one) issued its last half-yearly report (in November) for the German government. "That's why I don't see any reason to act." (21-Apr-04)
ECB Chief Economist Issing (Germany): "The recovery...won't sustain itself for very long and won't be very strong if private consumption and domestic demand don't support it more than they have until now. We're not talking about a consumer spending spree. It would be enough if consumer spending rose in line with real incomes." (10-Apr-04)
Policy Outlook
ECB officials have left a theoretical door open to the possibility of further rate cuts, but have also indicated that rates are appropriate for now and stressed the need for exit strategies after the end of the crisis. In the central scenario we would not expect the ECB to cut rates further or to extend the asset purchase program to include corporate bonds. Only if the central bank is convinced that the banking channel is not functioning are other options likely.
Bank lending remains key for eurozone financing of both the corporate and the household sector, which is the reason why the ECB's stimulus measures continue to focus on this channel. The decision to buy covered bonds and, most importantly, the introduction of 12 months tenders have been described by president Trichet as enhanced credit support.
The hope is that by giving banks more funding security, the ECB will be able to unlock the credit channel. Last week's first ever 12-months tender saw the ECB allocating a record EUR 442 bln to more than 1,000 banks, at a rate of just 1.0%. Demand was higher than expected, even though the underbidding in the ECB's regular 7-day refinancing tender already indicated that banks would be switching from short term financing to the new 12 months facility.
The ECB's balance sheet already expanded to around EUR 1.7 bln before the tender. The massive liquidity injection is of considerable importance for eurozone banks, which may have come under further pressure without the help of the ECB.
However, deposit levels of banks with the ECB have jumped higher after the tender, which suggests that banks are once again hording liquidity. And so far the impact on bank lending has been limited, so that even ECB's Weber warned last week that if there are no signs of a revival the ECB may be forced to circumvent the bank channel as other central banks have done by buying commercial paper outright. The problem with that approach is that it will also fail to reach the bulk of small and medium sized companies.
The ECB will now wait and see if its latest action does unlock the credit market. While in the central scenario we do not expect any further action from the central bank, Weber's comments highlight that the ECB still has options open if the current measures fail.
Updated: June 29, 2009
Evolution of Inflation Expectations as Implied by French Indexed Government Bonds
(Assuming constant risk premia for inflation volatility and liquidity)
Updated March 4, 2009 - Source: Bloomberg
Updated March 4, 2009 - Source: Bloomberg
Recent Notable Quotes
ECB's Bini Smaghi: A central bank that "looks at all costs at growth is driven to make policy decisions that feed instability". A central bank "must look to the medium term, it must look to price stability". (June 25,2009)
ECB's Noyer: The interbank market is returning to normal. (June 25,2009)
ECB's Provopoulos: "It is true that recently there have been indications of a slowing in the worsening, or a gradual stabilization, of economic activity in the U.S. and Europe, creating optimism that a recovery could begin earlier than expected". "These signs, however to not necessarily prejudge a quick return to growth. The degree of uncertainty for the course of the global and European economy remains high". (June 25,2009)
ECB's Weber: "There is no relevant risk of deflationary effects". While the Bundesbank "does not expect a substantial recovery in the near future" it sees "good chances for the economy bottoming out in the second half of 2009". (June 24,2009)
ECB's Bini Smaghi: "A monetary policy which quickly brings rates to zero but is not able to generate expectations of stable rates on that level, may turn out to be less effective than a policy which keeps rates slightly higher with stable expectations and allows the yield curve to remain flatter. If we look at the results obtained in terms of yield curves and inflation expectations, we can appreciate the ECB's strategy in reducing rates". The "massive expansion of monetary liquidity made in order to weather the crisis will have to be rapidly eliminated to avoid repeating the same phenomenon that happened and to avoid speculative bubbles". (June 24,2009)
ECB's Weber: ECB "has used the room for rate reductions that was created by waning inflation risks and a dramatic worsening of the economic situation". After providing unlimited liquidity to banks and the plan to buy covered bonds "additional steps are not necessary at the moment". "Politicians and central banks have reacted to provide access to cheap credit for companies and households". If banks do not pass on more favourable financing conditions, "we have to bypass the banking sector". "Direct intervention would then become necessary". Intervention is "not necessary at the moment". (June 23,2009)
ECB's Bini-Smaghi said that "we know from history that premature exits from crises have made crises worse". He added that the "greatest risk" to an economic recovery is if "governments, financial markets and market participants start to base their behaviour on the wrong inflation expectations". (June 23,2009)
ECB's Noyer said the current refi rate of 1% is "appropriate" and that rate cuts can't jeopardize price stability.
