Forex News: Currency Briefing: Liquidity concerns or disinflation concerns
It’s turning out to be an interesting week, this one. Markets have the chance to hear the introductory public appearances of Fed Chair Janet Yellen twice this week, but in addition we had an ECB official jittering the markets on Wednesday and finally, we will have the ECB monthly bulletin due at 09:00 UTC today.
With the monthly bulletin the ECB meets its legal requirement to publish reports on the activities of the ESCB at least every quarter (as per Article 15.1 of the Statute of the ESCB). The bulletin is published one week after the monthly meeting in which the Governing Council of the ECB takes its monetary policy decision. The main purpose of the bulletin is to explain the decision and to make it more transparent by providing a detailed analysis of the current economic situation and risks to price stability. In brief, what was not heard or answered in the press conference following the interest rate decision, could be found in this official paper.
Each monthly bulletin also includes articles (except for the March, June, September and December issues), euro area statistics and annexes.
The ECB kept interest rates on hold last Thursday but announced it was watching global markets closely and was ready to act if prices weaken further. With one of the greatest concerns of the central bank remaining a disinflationary environment with the IMF warning of deflation risk, Draghi sent a clear indication the ECB was ready to take further measures if needed, while indicating no new changes to the monetary policy. When asked about the inflation outlook, Draghi said low inflation over a prolonged period was a risk that could not be ignored, but he attributed the disinflation trend to low food and energy prices, and said he does not see deflation, citing stable inflation expectations.
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So, why did Benoit Coeure yesterday mention the negative deposit rates? The ECB elected last Thursday to leave its benchmark refinancing rate unchanged at 0.25 per cent, its deposit facility unchanged at 0 per cent and its marginal lending facility unchanged at 0.75 per cent. Draghi also said most of the discussion at the governing council meeting was focused on the need for additional information before implementing further policy measures, such as to cease sterilizing the bond purchases it makes under its SMP program. Draghi pledged it was one instrument they could use to ease liquidity conditions, but explained it was not discussed at this month’s Governing Council meeting.
In this case, Coeure’s concern could again be about the short-term problem the ECB is worried about – liquidity.
Today’s ECB monthly bulletin would probably provide some more clarity about what the bigger concern of the Governing Council is for its next meeting in March. In any case, ECB monetary policy tools are still not exhausted.
With regards to Draghi’s speech at the conference for the 20th anniversary of the establishment of the European Monetary Institute, there were several interesting topics discussed, amongst others the strengthening supervision and higher quality of financial integration.