09 March 2009

EZA 886 Report: ECB Observer

ECB 5 March Council Post-Meeting Assessment

 · As widely expected, the ECB on 5 March cut its main refinancing rate by 50 bp, to 1.5%, lowering also by 50 bp its marginal lending and deposit facility rates to 2.5% and 0.5%.

· With a severe fall in world trade volumes and a pronounced decline in euro area domestic demand, real GDP contracted markedly in 2008 Q4 and remained weak in early 2009.

· Inflation, having fallen to 1.1% in January, was broadly unchanged at 1.2% in February, inflation expectations remain firmly anchored and monetary analysis confirms inflationary pressures are diminishing.

· ECB Staff revise macro projections sharply down, with real GDP now seen falling by 2.7% in 2009 and flat in 2010, and inflation averaging +0.4% in 2009 and +1.0% in 2010.

· Trichet does not rule out further cut in ECB's 'refi' rate but notes that ECB's deposit facility rate, now at 0.5%, is very, very low and Governing Council is still debating possible additional non-standard monetary easing measures, ruling nothing out.

 EZA Conclusion: Intense debate continues in the Governing Council about what the (non-zero) floor should be for the 'refi' rate and for the deposit facility rate, and the related question of whether, and what, new 'quantitative easing' measures might be needed as a 'Plan B'. No further rate cut seems likely until these issues are resolved, which could mean no new steps before June.
 

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