Thursday, November 6, 2008

ECB cut IR by 50 bp - is not precommitted

ECB cut IR by 50 bp and lowers outlook for growth and inflation. In the QaA Trichet continues to point the way for 21st century central banks with a pragmatic approach to the level of IRs to guarantee macroeconomic stability.

The Federal Reserve has to follow the ECB by approaching interest rate decisions with more pragmatism and less preemptive precommitment. It will become the new paradigm for all central banks!

Q, On the question if the governing council is now trying to get ahead of the curve by slashing interest rates:

We are pragmatic and we look at facts and figures. (Trichet was referencing to ULC and employee compensation costs which have much increased over the last years) We are doing what is good at any given time without being hampered by being precommitted.

Q, on the role of central banks in general:
We are all doing what is expected under this exceptionally difficult circumstances

Is there more discipline in macropolicy necessary?
We have to take into account to introduce a new framework that would permit to avoid the persistence of very big imbalances both domestic and external.
An appropriate level of surveillance and discipline is lacking and has to be reintroduced.
click for QaA

From the introductory statement:

Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating.

There is also some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit to euro area residents, mostly taking the form of smaller holdings of securities. At the same time, for the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations. In particular, the maturity composition of loans suggests that non-financial corporations continued to obtain funding, also at relatively long maturities. However, more data and further analysis are necessary to form a robust judgment.

To sum up, the intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. Hence, when taking all information and analysis into account, there is a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely. At this juncture, it is therefore crucial that all parties, including public authorities, price-setters and social partners, fully live up to their responsibilities. The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead. We expect the banking sector to make its contribution to restore confidence. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective. In so doing, it supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

source: Jean-Claude Trichet, President of the ECB,

Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 6 November 2008

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