Ieuro 081002


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Ieuro 081002

  1. 1. Meeting: October 2nd 2008 Next meeting: November 6th 2008 Rate cuts: when, not if. Miguel Jiménez • The ECB’s Governing Council has left its key official rate unchanged at 4.25, as expected. However, the Pedro P. Álvarez Lois option of cutting rates today was also discussed. • Uncertainty is “extraordinarily high” for the ECB Agustín García Serrador Council. Downside risks to growth have clearly increased, while upside risks to inflation has “diminished somewhat, but not disappear”. • Although there is high uncertainty about the timing, ECB official rates our central scenario is now for a rate cut of 25 bp at 4.50 next month’s meeting, and further cuts during 2009 4.25 down to 3%. 4.00 3.75 3.50 The recent intensification of the financial market turmoil was at the heart 3.25 of today’s Council discussions. The deterioration of growth prospects in 3.00 the euro area confirmed by recent indicators and aggravated by tighter 2.75 financing conditions, together with diminished upside risks to price 2.50 Nov-08 Nov-09 May-08 May-09 Jan-08 Mar-08 Jul-08 Jan-09 Mar-09 Jul-09 stability, have led to the consideration of a rate cut by the Governing Sep-08 Sep-09 Council. The policy decision to keep rates unchanged was unanimous, but Mr. Trichet made clear at the very beginning of the press conference Current BBVA forecast Previous BBVA forecast Source: ECB & SEE BBVA that a rate cut today was also an option. When asked about what stopped the Governing Council from cutting rates, Mr. Trichet said that the risks to price stability have not disappeared. This is also in the Statement, which includes nonetheless an important change in this respect: “upside risks to price stability have diminished somewhat, but not disappeared”, instead of “risks to price EMU: 3-month interest rates (Euribor future contract and BBVA forecast) stability over the medium term prevail” from last month. Mr. Trichet was 5.5 5.5 also inquired about the predictability of the Council actions, and replied that any action would be taken at any time to ensure the achievement of 5 5 the ECB’s objectives. To us this is a clear sign that the ECB could cut rates even outside standard meetings, if necessary. 4.5 4.5 4 4 Regarding economic activity, the statement emphasises the “extraordinary high degree of uncertainty” due to the financial market market - 2 oct 3.5 3.5 turmoil and the evidence from recent data that economic activity is market - 1 oct weakening. Mr Trichet said that a similar situation was never seen before 3 3 1t08 2t08 3t08 4t08 1t09 2t09 (in the history of the ECB). The statement also considers that the economic outlook is “subject to increased downside risks”. A gradual recovery in now expected in the course of 2009. But when asked if the Source: Bloomberg and BBVA ECB maintains its view that the recovery would start as from the last quarter of 2008, Mr Trichet implicitly recognized that the outlook has
  2. 2. worsened by reminding us that they always said that after the trough in the second and third quarter of this year the risks to activity were downwards. On the reasons of why inflation risks have moderated, the statement includes the relative decline in energy and commodities prices experienced recently. Moreover, and this is new, the weakening in demand is expected to help bring inflation in the euro area close to the ECB target. Regarding the possibility of second-round effects, the Statement emphasizes the acceleration of unit labour costs in the second quarter. With respect to monetary developments, the statement repeats comments on some relative moderation of broad money and credit aggregates, albeit data does not include the recent events in financial markets. Mr. Trichet was repeatedly asked about the rescue measures on troubled financial institutions in some Euro Area countries. Overall, he supported them, without being explicit on the pertinence of an Euro area-wide plan, but pointing out that the current institutional arrangement leaves the responsibility on the individual governments. In the conclucion of the statement, the key sentence saying “the current monetary policy stance will contribute to achieving our objective” has been remove. Markets’ reaction: The euro fell from 1.391 to 1.375 against the dolar, while the Eonia future markets discount a 25bp rate reduction with a probability of 75%. Concluding remarks In front of increased evidence of deteriorating activity and (mostly) of very high stress in financial markets, the ECB has not disappointed and has clearly changed its tune from a hawkish to a pre-cut mode. Although the justification is disguised as higher downward risks to growth and lower upward risks to inflation, these have not changed enormously in our view, and the real reason lies in that risks from financial developments, which the ECB did not emphasize before but are now bluntly in front of us. Our forecast is for current tensions not to disappear in the short run, so we foresee a rate cut in November, although it could well be earlier in a snap decision if financial conditions deteriorate further, or could be delayed until December. We further expect four additional cuts in the course of 2009, down to 3% (instead of 3.25% in our previous forecast). Servicio de Estudios Económicos 2
  3. 3. Box: ECB Statements rd th th nd Concluding July 3 August 7 September 4 October 2 remarks* The Governing Council It remains imperative to remains strongly avoid second-round The Governing Council The Governing Council committed to effects and in price and discussed extensively the will monitor very closely preventing second- wage-setting. The recent intensification of all developments over the round effects and the Governing Council is the financial turmoil and Monetary period ahead. It remains materialisation of resolute in their its possible impact on Ready to act at policy crucial to avoid second- upside risks to price determination to keep economic activity and any time stance round effects and to stability over the medium inflation expectations inflation. They will keep inflation term. We will continue to firmly anchored and it continue to monitor expectations firmly monitor very closely all will monitor very closely very closely all anchored. developments over the all developments over the developments. coming weeks period ahead. The real GDP growth figures for mid-2008 will The euro area economy The most recent data The uncertainty be substantially weaker, is currently clearly confirm that surrounding this but this represents a experiencing an economic activity in the outlook for economic technical reaction to the episode of weak activity euro area is weakening. growth remains high strong growth in Q1. The characterized by high The economic outlook is and downside risks uncertainty commodities prices Increased subject to increased continue to relate to the surrounding this weighing on consumer downside risks Growth downside risks due to a potential for the outlook for economic confidence and demand, due to financial scenario on ongoing ongoing financial activity remains high as well as by dampened turmoil. financial market market tensions to affect and the downside risks investment growth. The tensions affecting the the real economy more continue to relate to the Governing Council real economy more adversely than potential for the expects this episode to adversely than currently anticipated. financial market be followed by a foreseen. tensions to affect the gradual recovery. real economy. Likely to remain well above 2% for quite Likely to remain well Likely to remain well Likely to remain well some time, moderating above 2% for quite above 2% for some above 2% for quite only gradually in 2009 some time, moderating time, moderating some time, moderating and likely to be more only gradually in 2009. gradually during the only gradually in 2009. persistent. Imperative The Governing Council is course of 2009. The Gradually Inflation It is imperative to ensure that they do not monitoring price-setting Governing Council is moderation that medium and long- become entrenched in behaviour and wage monitoring price-setting term inflation longer-term negotiations in the euro behaviour and wage expectations remain expectations or lead to area with particular negotiations with firmly anchored. broadly based second- attention. particular attention. round effects Upside risks to price Clearly on the upside. Clearly on the upside. Clearly on the upside. stability have diminished These risks include the These risks include the These risks include the somewhat due to the possibility of further possibility of further possibility of renewed weakening in demand. rises in energy and rises in energy and rises in commodity Risks do not disappear: food prices … in food prices … in prices … in the possibility of renewed Upside risks are Risks administered prices and administered prices and administered prices and increase in commodity diminishing indirect taxes... Most indirect taxes... Most indirect taxes... Most prices, in administered importantly, price and importantly, price and importantly, price and prices and indirect wage-setting behaviour wage-setting behaviour wage-setting behaviour taxes. Very strong could add to inflationary could add to inflationary could add to inflationary concern about price pressures pressures pressures. and wage-setting behaviour. Confirms the prevailing Confirms the prevailing The still strong Confirms the prevailing upside risks to price upside risks to price underlying pace of Strong upside risks to price stability at medium to stability at medium to monetary expansion underlying pace stability at medium to longer-term horizons. longer-term horizons. The points to upside risks of monetary longer-term horizons. While the growth of broad growth of broad money over the medium term, expansion, but it Underlying rate of money money and credit and credit aggregates although the growth of Monetary is moderating; and credit growth remains aggregates is showing continue to show some broad money and credit analysis no significant strong. The availability of some signs of signs of moderation. The aggregates moderated. impact from bank credits has not been moderation, the strong strong underlying pace of The availability of bank ongoing significantly affected by underlying pace of monetary expansion credit has, as yet, not financial the tensions in financial monetary points to points to continued been significantly affected tensions markets. continued risks to price upside risks to price by the ongoing financial stability. stability. tensions. Movement 0.25 0.0 0.0 0.0 “Refi” rate 4.25 4.25 4.25 4.25 * BBVA interpretation of the ECB opinion according the statement and the press conference Servicio de Estudios Económicos 3
  4. 4. Relevant events before the next ECB meeting (November 6th) October, 14 Euro Area industrial production, August October, 15 Euro Area inflation, September October, 17 Euro Area trade balance, August October, 17 Euro Area construction output, August October, 23 Euro Area industrial new orders, August October, 28 Euro Area money supply (M3), September October, 30 Euro Area business and consumer survey, October October, 31 Euro Area flash estimate inflation, October October, 31 Euro Area unemployment rate, September November, 3 Euro Area PMI survey, October November, 4 Euro Area producer prices, September Servicio de Estudios Económicos 4