Tag Archives: European Central Bank

Draghi says Hello and cuts the ECB interest rate

Today, new ECB president Mario Draghi led the Governing Council of the ECB in its meeting on monetary policy decisions. It turned out to be an interest cut, as the interest rate on main refinancing operations was decreased from 1.5% to 1.25%. The move was mainly motivated on falling inflation expectations and an expectation of dampened economic activity (with emphasis on downside risks). As such this is a move that is consistent with inflation targeting, and it appears that the ECB under Drahgi will continue the practice to let interest-rate decisions be guided by short-run developments in real economic activity, while securing that inflation expectations are held in check. Hence, … Continue reading

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Trichet says Goodbye and SMP peaks at 173 bn. €

Today marks the last day of Jean-Claude Trichet’s tenure as president of the European Central Bank. Bild am Sonntag interviews him on the occasion. In terms of being the main person responsible for the ECB’s mandate of price stability, he has been a success. The inflation measure used by the ECB has moved quite closely around the value which after some introductory opaqueness is stated as close to, but not above, 2%. Surely, during the peaks of the financial crises there were upward and downward swings, but on average you would not call Trichet a man that leaves a bank with little anti-inflation credibility. What he does leave is a … Continue reading

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ECB too Strong for Stark

Officially, member of the ECB’s executive board Jürgen Stark has decided to quit his position prematurely for “personal reasons” (mentioned twice in the brief press release). This can, of course, cover a lot, but does not exclude what is on most people’s mind: He is quitting because he is in opposition to ECB’s actions on the European bond market. Like his fellow contryman, German Axel Weber, he has obviously not been pleased by the ECB’s slow but steadily increasing involvement in fiscal affairs. It is well known that decisions to purchase sovereign debt in the secondary market (which just about makes it constitutionally legal), have not been unanimous, and although … Continue reading

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ECB public debt purchases by numbers

I wrote last week about the ECB’s renewed purchases of public Euro debt (in particular Spanish and Italian). Now the actual numbers are out, and the confirm what market participants signaled: The ECB was not in for a small operation. The ECB purchased for around 22 billion Euros, thereby raising its stock of debt purchased under the Securities Markets Programme to 96 billion Euros. An unprecedented increase in the stock of almost 30 %. Today, the ECB will suck up the associated liquidity created (and will do so the next week, and the next . . . ). From a weekly perspective, the operation appeared successful as bond yields have … Continue reading

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ECB buys public debt again: Otmar Issing voices strong critique

In a rare Sunday press release (August 7) , the President of the ECB, Jean-Claude Trichet (on behalf of the Governing Council), hailed the fiscal and structural measures of Spain and Italy and their commitments—along with other member countries—to strictly adhere to “fiscal targets”. Then he emphasized that countries are sovereign states that themselves should honor their own “signature as a key element in ensuring financial stability in the euro area as a whole“. (Oh, and he supports the joint statement of the same day by France and Germany, which is not surprising given the occasional word-by-word similarities.) Then he concludes that the Securities Markets Programme (SMP) will be activated. … Continue reading

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Steady as she goes: The ECB keeps policy rate unchanged again

After having raised the key policy interest rate in April (from 1 to 1.25 %), the ECB kept it unchanged on June 9, thus repeating their “non-action” of May. This is a somewhat bold and perhaps unconventional move by a central bank whose overriding legal mandate is price stability. Given their own definition of price stability as meaning an annual Euro-wide HICP-inflation rate not above 2%, you would have thought that the increase in April would have been followed by further increases. After all, HICP-inflation is currently above 2.5%, and unemployment is falling slightly (continuing the downward adjustment, which I have argued earlier could have been the trigger for the … Continue reading

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Unemployment goes down and ECB raises policy rate

Today, the ECB raised its policy rate by 0.25 percentage point to 1.25%. This came hardly as a surprise, given the various statements from ECB officials in recent weeks. Many commentators have motivated this by the increasing HICP inflation. However, I would argue that there are other just as applicable, if not better, reasons. Namely that economic activity is picking up, and unemployment is crawling down. Indeed, in the press release following the rate increase, Governor Trichet states Let me now explain our assessment in greater detail, starting with the economic analysis. Following the 0.3% quarter-on-quarter increase in euro area real GDP in the fourth quarter of 2010, recent statistical … Continue reading

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The Fed and the ECB: “Spurious Bedfellows”

Some days ago, I wrote about an interesting post by Gavin Davies on his Financial Times blog, where he argued that European monetary policy, through the actions of the German Bundesbank and now the European Central Bank, follows the US Federal Reserve’s interest rate decisions with some delay. An observation leading him to label the FED and ECB “strange bedfellows”. The data behind the argument is seen in the following figure: The Federal Reserve’s policy intentions are throughout the period measured by the target value for the Federal Funds Rate (formally, this time series is discontinued as of December 2008, and I show the upper value of the 0-0.25% target … Continue reading

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