ECB Does The NATO (No Action - Talks Only)

Thursday, November 03, 2005

As expected the governing council of the European Central Bank left leading interest rates unchanged. The key overnight rate remains at 2% since June 2003. ECB president Jean-Claude Trichet had an interesting interpretation for rising inflation though. Headline inflation of 2.5% may be higher than desired but "there are no domestic inflation pressures," he said, adding later that energy prices would suggest a more lasting impact on overall price developments. Inflation won't go away that soon. "It is likely that HICP inflation will remain elevated in the short term," he said. The ECB had set itself the target that inflation should not climb above an annual rate of 2%. Maybe Eurostat will introduce a core rate at some point of time to come.
Rapidly expanding money supply M3 stemmed from the housing bubble in some Euro member countries, Trichet said. "Growth in the monetary aggregate M3 has been driven by its most liquid components, confirming the increasingly dominant impact of the low level of interest rates. Furthermore, the growth of borrowing, especially mortgage loans, remains very robust. In this context, price dynamics in a number of housing markets need to be monitored closely."
One wonders why the ECB has set a target rate of 4.5% for M3 in the first place when the guarddogs of monetary stability are still sitting on their hands in the face of 8.5% annual M3 growth. M3 growth has overshot the target rate since the introduction of the common currency. Credibility gets dented this way when no action is taken since both monetary targets have gone over the threshold set in the first place.
M3 worries won't go away that easy, one can take from the ECB's fiscal outlook. "As regards fiscal policies, a number of countries have presented their 2006 budget plans. Despite some welcome progress with fiscal consolidation, the outlook for countries in excessive deficit is a matter of great concern, as there is a risk of consolidation not proceeding and commitments for this year and next not being met. Further delays in the correction of excessive deficits and a continued inclination to look for the most lenient way to implement the procedural steps of the revised Stability and Growth Pact risk undermining the Pact's credibility," Trichet said.
Listening to the Q&A session, an important pillar in the ECB's drive for more transparency, Trichet's repeated remark that the ECB could hike rates anytime when needed, is of note.
For the full text of Trichet's introductory remarks click here.
UPDATE: Macroblog points to this Reuters roundup of statements from ECB governors since the last council meeting.

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