Thursday, August 7, 2014

ECB still ready to use QE, sees uneven recovery

    The European Central Bank (ECB) confirmed its monetary policy guidance that key interest rates "will remain at present levels for an extended period of time" and that its governing council "is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address the risks of too prolonged period of low inflation."
    The ECB, which earlier today maintained its benchmark refinancing rate at 0.15 percent and its deposit rate at minus 0.10 percent, said the latest economic data was in line with its assessment of "a continued moderate and uneven recovery of the euro area economy."
    The ECB has often described the economic recovery in the euro zone as "moderate," but the use of the word "uneven" is new, reflecting the north-south divide in the 18-nation area, with countries in the south struggling while the economies in northern Europe are doing better.
    The contrast was on full display yesterday when preliminary data showed that Italy's economy shrank for the second quarter in a row, with Gross Domestic Product falling by 0.2 percent from the first quarter after a 0.1 percent decline in the first quarter from the previous quarter.

    "With regard to the second quarter, monthly indicators have been somewhat volatile, partly reflecting technical factors. Overall, recent information, including survey data for July, remain consistent with our expectation of a continued moderate and uneven recovery of the euro area economy," ECB President Mario Draghi told a press conference.
    The ECB's rate cut and a package of measures from June, including the 400 billion euroTargeted Longer-term Refinancing Operations (LTROs) that will take place in coming months should help ease funding conditions further and stimulate credit to businesses, Draghi said.
    In the first quarter of this year, the GDP of the euro zone expanded by 0.2 percent from the previous quarter for annual growth of 0.9 percent, up from 0.5 percent in the fourth quarter.
    But the fresh GDP data from Italy illustrate how uneven the economic recovery is. Unemployment rates also vary across the region, with June jobless rates of 12.2 percent in Italy compared with a 5.3 percent unemployment rate in Germany.
    Draghi is also hoping that stronger growth will help push up inflation, which declined to 0.4 percent in July from 0.5 percent in June, the weakest reading since October 2009. The drop in inflation reflected lower energy prices, Draghi said.
    However, medium and long-term inflation expectations for the euro continue to be anchored to the ECB's aim of inflation that is close to, but below 2.0 percent, Draghi added.


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