ECB Left Policy Rate Unchanged, Pledged to Monitor Euro's Strength

Special Reports | Written by ActionForex.com | Feb 07 13 15:54 GMT

As widely anticipated, the ECB left the main refinancing rate unchanged and announced no new stimulus program. The overall tone of the statement, similar to the previous month, remained dovish. The central bank has clearly noticed the strength of the euro but President Draghi reiterated the position that it is the effect on growth and inflation that will make them react.

The ECB noted that weakness in the economy remains with risks skewing to the downside. However, recovery would be seen later in 2013 "with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand". This view was the same as the one in January. Concerning inflation, the ECB continues to expect inflation to fall below 2% in "coming months". Also same as January’s statement, the central bank noted that inflationary pressure should remain contained and inflation expectations remain anchored. Risks to inflation are broadly balanced.

President Draghi acknowledged that repayment of banks as a sign of improvement in confidence in financial markets. Concerning the poor lending figure, he attributed it to weakness in credit demand and the "continued effect of credit risk considerations on the tightening of credit standards". Policymakers believed that the overall tone in the lending activates is not alarming.

 

The strength of the euro has caught the market great attention. Regarding this, Draghi said that "the appreciation is, in a sense, a sign of return of confidence in the euro". Moreover, he stressed that "the exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned". Moreover, Draghi stated that the ECB would will "closely monitor" developments in the money market and "their potential impact on the stance of monetary policy, which will remain accommodative with the full allotment mode of liquidity provision".

 

RBA Left Rates Unchanged, Indicated More Easing Likely

Special Reports | Written by ActionForex.com | Feb 05 13 06:22 GMT

The RBA left the cash rate unchanged at 3%. Yet, policymakers indicated in the accompanying statement that possibility remained for further rate cut as inflation was contained by sluggish job market. The statement was dovish, reiterating the view that the mining sector has almost peaked. The RBA's outlook on growth showed little change from the December statement, noting that 'global growth is forecast to be a little below average for a time' but risks around this central scenario 'appear to have abated'.

Domestic economic growth was 'close to trend in 2012' as driven by 'increases in capital spending in the resources sector'. Yet, with the resource investment approaching its peak, 'there will be more scope for some other areas of demand to strengthen'. Policymakers viewed that 'the near-term outlook for non-residential building investment, and investment generally outside the resources sector, remains relatively subdued' while public spending remained constrained. Improvements were, however, seen in dwelling investment and exports of natural resources.

Concerning inflation, policymakers stated that it is consistent with the medium-term target. Going forward, softness in the labor market and the rise in unemployment rate would 'contain pressure on labor costs' while 'businesses are likely to be focusing on lifting efficiency under conditions of moderate demand growth'. These issues would 'help to keep inflation low, even as the effects on prices of the earlier exchange rate appreciation wane'. Surprisingly, the statement did not pay much attention to the recent surge in iron ore prices, just noting that 'some commodity prices have firmed over recent months'.

On the whole, the central bank believed that inflation remained on target but economic growth would be a little below trend. At the concluding statement, it’s said that 'the Board's view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate. The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand'.

 

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