• The Governing Council decided today to reduce the key ECB interest rates by a further 50 basis points
• The world economy has weakened substantially in recent months, affecting increasingly also emerging market economies
• In a climate of heightened uncertainty, a severe fall in world trade volumes has been accompanied by a pronounced decline in domestic demand in the euro area
• Euro area real GDP contracted markedly in the fourth quarter of 2008, by 1.5% on a quarterly basis
• Available data and survey indicators suggest that economic activity in the euro area remained weak in early 2009
• Both global and domestic demand will decline in 2009 but thereafter recover gradually
• The outlook for the economy continues to be surrounded by uncertainty
• The risks to the economic outlook now appear to be more balanced
• There may be stronger than anticipated positive effects, also on confidence, stemming from the extensive macroeconomic stimulus under way and reflecting other policy measures taken
• Annual HICP inflation has been steadily declining since the middle of 2008, when it reached a peak of 4.0%
• The decline in inflation since last summer primarily reflects the sharp falls in global commodity prices over this period
• Signs of a more broad-based reduction in inflationary risks are also increasingly emerging.
• Headline annual inflation rates are projected to decline further in the coming months, possibly temporarily reaching negative levels around mid-year
• A considerable degree of uncertainty surrounds the inflation projections
• The latest data and estimates provide further evidence of an ongoing deceleration in the underlying pace of monetary expansion in the euro area
• The further deceleration in underlying monetary dynamics has contrasted with the high month-to-month volatility of developments in M3 and its components which has been observed since the financial turmoil intensified in September 2008
• While annual M3 growth declined further, to 5.9%, in January 2009, the annual growth rate of the narrow aggregate M1, which includes the most liquid assets, rose to 5.2%.
• It appears that the substantial past reduction in the key ECB interest rates is increasingly being passed through to bank lending rates
• The transmission mechanism of monetary policy is not significantly hampered in the euro area
• Updated stability programs and recent addenda confirm the prospect of a sharp and broad-based deterioration in euro area public finances
• The ECB supports the Commission’s intention to initiate excessive deficit procedures for several countries. This is crucial to preserve the credibility of the EU fiscal surveillance framework
• It is essential that government support measures do not distort competition and delay necessary structural adjustment
In addition to the introductory statement, Mr. Trichet also updated the Euro-area staff projections. There have been some major downgrades both in the GDP and in the inflation projections, mainly due to the marketable deterioration of the economic outlook.
The ECB forecasts that the economy would contract between 3.2% and 2.2% in 2009, down from December forecast of -1.0% to 0.0%. In 2010, the GDP forecast range from -0.7% to 0.7%. The CPI outlook had also been downgraded to 0.1% to 0.7% in 2009, much lower than the December estimates. In 2010, the ECB forecasts the CPI to range 0.6% to 1.4%. Despite the rather large downgrade in the CPI read, the Governing Council sees little risk of deflation in the coming period.
Overall, in the pre-written speech, Mr. Trichet did not say anything new from the last few meetings except that the risk for the economic outlook appears more balanced now. During the Question and Answers session, Mr. Trichet outlined that the Voting Council has not decided if the present 1.50% interest rate will be the bottom.
Many of the questions addressed during the Q&A session refered to the future of the monetary policy adopted by the central bank. Mr. Trichet did not provide a clear path ahead, but yet again referred to the drawbacks associated to a very low interest rate, also known as liquidity trap. Mr. Trichet said the bank is planning to implement a new “non-standard method”, but did not give any additional details about it. Another measure taken by the ECB, seen as a non-standard measure, is to expand the fixed rate procedures for an unlimited term, something that helped the Euro-area banking sector up until now.
During the press conference, the euro extended the decline against the greenback from the overnight session, and fell another 80 pips. However, in the last part of the press conference, when Eastern Europe was the main theme, the euro started again to gain ground, and recovered most of the pips lost earlier.