ECB Will Make Money Ever Cheaper - Governors

Monday, December 08, 2008

Reflecting on the sharp and sudden downturn in most Eurozone countries the European Central Bank (ECB) can be expected to lower the price of Euros for banks even further after the record rate cut from last Thursday that brought the main refinancing rate to 2.50%, the lowest in 2 1/2 years.
Lower inflation rates due to sinking commodity prices and a Eurozone wide recession make ECB council members sitting on the edge, Reuters reported in a wrap up on Monday.
ECB President Jean-Claude Trichet, in testimony on Monday to the European Parliament's economic committee, said unexpected further declines in commodity prices could put downward pressure on inflation, while upside risks to price stability could materialise if the fall in commodity prices were to reverse.
The ECB staff has lowered its inflation expectations for 2009 dramatically, forecasting an inflation rate of 1.1% to 1.7%.
Other governors said during the weekend that the ECB has not run out of ammunition to combat inflation while keeping monetary policy accommmodative to the needs of Eurozone banks who are currently hooked to a one trillion Euros lifeline that can be expected to grow more, taking recent history as a guidance for future policy moves.
Athanasios Orphanides, head of the Cyprus central bank and an ECB Governing Council member, said the euro zone economy was set for an extended downturn and inflation would keep falling.
"In light of the continuing improvement in the outlook for inflation, even following last week's interest rate action by the Governing Council there remains considerable room for monetary policy to manoeuvre," he told the Cyprus parliament's finance committee.
Orphanides's Greek counterpart, George Provopoulos, said on Monday that the ECB has enough monetary tools. "There is no issue when it comes to lack of ammunition. The ECB has ample monetary policy ammunition," he told the British-Hellenic Chamber of Commerce.
Austria's Ewald Nowotny told Bloomberg news agency that the ECB is keeping its options open on interest rates and does not want to be pressured by expectations.
"The situation is open," he said. "We'll observe how things are working, what's happening, and then we'll see. The ECB certainly doesn't want to be pressured by expectations."
"I favour a steady-hand policy. Having said that, one should always retain the flexibility to react to new developments. There's certainly room for manoeuvre if the future economic development is significantly weaker," he said.
Spain, one of the countries hit hardest by the property bust sees cheaper Euros in the future too.
The ECB does not exclude reducing the price of money again in the next few months, (spanish) Executive Board member Jose Manuel Gonzalez-Paramo said.
Gonzalez-Paramo said at a conference in Malaga which was reported by the Spanish newspaper La Opinion de Malaga, over the weekend, that the inflation outlook was improving.
"We don't rule out reducing the price of money again in the next few months," he was quoted as saying.
With the dramatic downturn of the Eurozone economy in mind that has led to a fully fledged recession accompanied by rising unemployment it appears that the ECB governing council is now more worried about GDP growth than its single mandate to fight inflation. Inflation may indeed sink below the 2% target in the light of receding commodity prices after plunging to 2.1% in November.
But this policy may have its pitfalls. These latest announcements show that the ECB is blind on monetary inflation which stems from an overly abundant supply of freshly digitized Euros. This way the ECB hopes to keep banks afloat that speculated with mortgage backed securities, forex loans and had in general too soft guidelines for new loans. The ECB's balance sheet roughly tripled within the first 10 years of the common currency that is under strain from the very different economic situation in the 15 Eurozone countries. With this kind of monetary expansion all talk of a possible deflationary development can be called bull.....


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