09 October 2008

EZA 866 Report: ECB Observer

ECB 8 October 50 bp rate cut

ECB joins Fed and 3 other central banks in co-ordinated 50 bp rate cut

In a joint statement released on 8 October, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve Board, the Sveriges Riksbank and the Swiss National Bank (named strictly in alphabetical order) announced that each was cutting its key interest rates by 50 basis points. The statement also emphasised that the Bank of Japan expressed its strong support for these operations.

In the case of the ECB, the minimum bid 'refi' rate is being reduced from 4 1/4% to 3 3/4%, the marginal lending rate from 5 1/4% to 4 3/4% and the deposit facility rate from 3 1/4% to 2 3/4%. The one-page press release issued by the ECB opened with a short common statement agreed between all the central banks involved, which focused entirely on the global circumstances each faced, namely the moderation of inflationary pressure, reflecting a marked decline in energy and other commodity prices, diminishing inflation expectations, augmented downside risks to growth and thus diminished upside risks to price stability, so that "some easing of global monetary conditions is warranted" [EZB's italics].

Although the language here, very reminiscent of ECB President Trichet's press statement and press conference last Thursday (unprecedented co-operation, inflation expectations remain anchored to price stability, downside risks to growth, diminished upside risks to price stability, some easing of global monetary conditions is warranted, see EZA865/06Oct08) suggests that the ECB had a major say in the drafting of this joint statement, probably to minimise the damage such a sudden change in stance might cause to its credibility. Even so, EZA believes that the initiative here was taken at the behest of the US Federal Reserve, as foreshadowed in our last report [EZA865/06Oct08], in view of the limited impact of the US Government's recent 'rescue package' and in conjunction with the Bank of England, given the announcement of the UK's even more far-reaching bail-out proposals. It is significant that, of the five central banks' press releases, the ECB's has the least to say in its press release about the local justification for the rate cut, merely the following two sentences, which are a paraphrase of what appeared in Trichet's Introductory Statement to last week's press conference:

In the euro area, upside inflationary risks have recently decreased further. It remains imperative to avoid broad-based second-round effects in price and wage-setting. Keeping inflation expectations firmly anchored in line with our objective and securing price stability in the medium term will support sustainable growth and employment and contribute to financial stability.

While the ECB keeps alive the concerns about second-round threats to price stability and its determination to keep inflation expectations anchored, the other participants in their press releases, dwell at much greater length on the increasing downside risks to growth and the consequential reduction in the risks of inflation.
 

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