The European Central Bank met market expectations and held key rates steady in September as market pressures intensify and growth slows, where the bank is cornered between slowing growth and deepening debt woes.
The Governing Council voted to keep the main refinancing rates steady at 1.50%, while also maintained the marginal lending facility at 2.25% and the deposit facility at 0.75% as widely expected. The ECB moved twice on rates this year raising rates by 25 bp in April and in July.
Growth slowed into the second quarter and now starting the third quarter with broad downbeat signals. The economy expanded a slim 0.2% in the second quarter down from 0.8% where leading economies slowed with Germany expanding a slender 0.1% and France stagnating! This is more downside pressure on the bank and on inflation which will prevent the ECB from any hasty decision at this critical phase!
With the slowing growth and deepening debt agony the bets actually are rising for the bank to alter its stance, and that is what investors are waiting for today! Recent comments from Trichet that the central bank will reassess inflation threats at the time it took the toll of restoring financial stability by extending liquidity lines and intervening in bonds markets.
Eyes are not on the decision as much as they are on the speech and expected new ECB projections for growth and inflation. The ECB shadow council already called on the bank to reverse the rate increases delivered this year to avoid recession while expectations are now for Europe and its leading economies to falter in the coming quarter with odds for Germany and France to at least stagnate after barely expanding in the second quarter which seriously questions the growth power in the aggregate area!
The flash August CPI estimate assured inflation is slowing and held at 2.5% after it peaked at 2.8% this year in April. The slowing growth and rising downside pressures over the outlook for the recovery is keeping the pressure on the ECB and supporting expectations that the bank might not move till the end of the year, and now possibly reverse its stance!
The hikes came amid deepening debt problems in the euro area and intensifying problems that are threatening the monetary union. Fears recently intensified with the doubts around Greece in particular after the EU/IMF suspended its mission and lenders are at odds whether the nation has met the requirements for the new tranche of aid.
Italy is also center stage with investors not convinced of its measures to tame the debt and reduce the deficit with the new amended 54 billion euro austerity plan that was approved by the Senate last night. More bad news for the euro area and for the ECB is the political tension in Germany with Merkel losing support more and more each day with the fifth election loss this year and now barely escaped criticism as the German Federal Constitutional Court today rejected lawsuits seeking to block the nation from participating in the euro area bailouts, yet the court still assured that it does not mean Germany can provide unlimited support and requested that future bailouts should require parliamentary approval.
For now, the focus is on Trichet to confirm the next step. The ECB President today undoubtedly will not signal any move and eyes are on the magic words whether “closely monitor” or “rates are appropriate” or “downside pressures” are clear which should determine the outlook for the policy by the bank.
