Welcome to our live blog on the Bank of England and European Central Bank interest rate decisions. UK times are used on this post.
15.03 This live blog is now closed. Follow FT.com for further news and analysis on the central banks’ announcements and a preview of the G-7 meeting.
15.02 So, as predicted, the ECB has revised downwards its outlook for growth, saying that the risks to the downside had “intensified”, and said that the risks to inflation are now “broadly balanced” (previously they were to “the upside”).
The president was visibly angry when responding to the ECB’s critics in Germany. He also reiterated the central bank’s distaste for Christine Lagarde’s comments on the need for a recapitalisation of eurozone banks.
Mr Trichet played down concerns over liquidity. He denied that there was a stigma attached to borrowing from the ECB and noted that the central bank provides unlimited liquidity through its open-market operations.
The president voiced his “respect” for Swiss National Bank’s decision to cap the franc’s appreciation against the euro. However, the case of Japan was, he said, “different”. Don’t expect the ECB to support any intervention with other G-7 members to stem the yen’s appreciation, then.
14.54 The president has now finished speaking. Key takeaways to follow shortly.
14.43 Mr Trichet distinguishes between liquidity concerns and capital concerns, but says “we stick to the results of the stress tests”. He adds: “I will not dramatise the situation, as has been done by some, whose methodology that we don’t think is correct.” Who could he mean?
14.41 The president doesn’t accept that there’s stigma attached to borrowing from the ECB.
14.34 Mr Trichet says Italy’s decisions on its budget are in line with the “first commitment” to the ECB.
14.32 Commenting on the decision to leave the deposit rate unchanged, the president says that tensions are “visible” and requests for liquidity “superior”, but notes that they are providing liquidity on a “full allotment” (unlimited) basis.
From Martin Sandbu:
The president dodged the question on deposits. He merely repeated that there was full allotment of liquidity, but did not explain why the governing council did not want to force more of the liquidity out into the interbank market by lowering the return on banks’ deposits with the ECB
14.24 Mr Trichet hits out at the ECB’s German critics. “We were called to deliver price stability by all democracies in Europe. We have delivered price stability impeccably. I’d like very much to hear the congratulations for an institution that has delivered price stability in Germany,” he says, adding that price stability is better now in the eurozone’s biggest economy than at any time in the past 50 years. Scary!
Martin Sandbu: Kid gloves off against those – in Germany especially – who call the ECB Europe’s bad bank! The ECB has delivered on price stability “impeccably” – and better than what the Bundesbank did, says a visibly angry president Trichet
Absolutely no consideration of haircuts on senior bondholders in Anglo Irish Bank – nor, presumably, in any eurozone bank
14.18 Mr Trichet says Ireland is gaining confidence. No word on haircuts for senior Anglo Irish debt.
14.14 The president is keen to note that the ECB was the first to act on liquidity pressures, way back in August 2007.
Martin Sandbu: Mr Trichet is hinting at a valedictory speech here. He is right that central banks are important for stability in uncertain times – and it has to be admitted that the ECB has been by far the most decisive actor of all the eurozone and euro member institutions.
14.13 The president says you can’t compare the yen – as one of the major currencies of the advanced economies – with the Swiss franc, which is “at the heart of Europe” and a relatively small economy. The yen and the Swiss franc are “two different cases”, he says.
14.08 Sharp words from Mr Trichet on governments. He says the ECB has long been “preaching in the desert”, and accuses lawmakers of “benign neglect”. Says he makes a “working assumption” that Greece is receiving a “very strong message from the IMF”.
On Switzerland, he notes the SNB’s “due contact” and “due and appropriate discussion” in announcing its decision to place a cap on the Swiss franc’s appreciation against the euro. “This is a decision we respect,” he says.
14.04 The president says little about the bond purchases.
Martin Sandbu: Mr Trichet clearly does not want to comment on the fact that the size of the purchases increased last week – nor that, even so, Italian yields have been rising again
14.01 Mr Trichet says latest decisions by Italian lawmakers are “very important”.
13.59 The president has said the ECB expects all of the decisions taken on July 21 to expand the powers of the European Financial Stability Facility will be comprehensively and rapidly implemented. He says that this is “absolutely fundamental”. From Martin Sandbu:
A barrage of words to impress on governments the need to effect change to the EFSF: “we expect, we ask for, we have the working assumption” that the July 21 decisions will be “fully, totally, rapidly implemented”. As if the president felt a need to underline his certainty to make up for the doubts in the markets that this will actually happen…
13.56 Mr Trichet has flagged that some financing conditions have tightened, which would imply that monetary policy is tighter than it otherwise would have been. But the monetary policy stance is “accomodative” he says, adding that the tightening of financing conditions has only occurred in parts of the eurozone.
13.54 The president has been keen to emphasise that there are no liquidity risks to eurozone banks.
Martin Sandbu: The president is clearly exercised by suggestions that there may be liquidity problems in the eurozone banking system. He is repeating comments he has made ever since Christine Lagarde’s Jackson Hole speech: the ECB will make sure that there is no liquidity issue for eurozone banks.
13.51 The president has reiterated that the balance to risks have changed. However, he would not say whether a rate cut was discussed at the meeting.
Martin Sandbu: Mr Trichet re-emphasised the changes to the risks for growth (downside, earlier balanced) and inflation (balanced, earlier upside). He does not explain why a deteriorating outlook doesn’t warrant an interest rate cut.
13.49 From Martin Sandbu:
The most interesting part of the decisions is to do nothing with the deposit rate, which remains at 0.75%. This could have been lowered to discourage banks from parking funds at the ECB instead of lending to each other, and so bring down market rates.
The lending rate was also left unchanged at 2.25 per cent.
13.47 The president says today’s decision was unanimous.
13.46 Mr Trichet has noted that monetary growth in the eurozone was low (annual growth rate of M3 was 2.0% in July 2011, after 1.9% in June).
Martin Sandbu: The monetary growth numbers are depressing but unsurprising. They probably mostly reflect a lack of demand for credit rather than a squeeze on supply.
Mr Trichet’s remarks on the inflation forecasts implies that there is no risk of monetary conditions being inflation-driving – the upside risks to inflation come from commodity prices and indirect taxes. Reason to be relaxed, some would say.
13.43 Peter Garnham notes that the euro is down 0.7 per cent at $1.3987.
13.42 From Martin Sandbu:
Mr Trichet seems to want to put to rest fears that eurozone banks could have liquidity problems. While underlining that the provision of unlimited liquidity is “temporary in nature” he signalled that the ECB will keep them in place (perhaps even extend them?) so long as there are doubts about liquidity availability.
13.40 Unfortunate slip of the tongue from Mr Trichet just then! He said interest rates (when he meant to say inflation) would fall below 2 per cent next year.
13.38 Mr Trichet confirms growth projections have been revised downwards. Inflation likely remain above 2 per cent in the coming months. Inflation should fall below 2 per cent in 2012. Range for 2012 is now “slightly narrower”. Risks to price developments are “broadly balanced”.
13.37 This from the FT’s Martin Sandbu:
Martin Sandbu: Calling monetary growth “moderate” is to put it mildly – it is virtually stagnant
13.35 Real GDP growth expected to increase only very moderately.
13.33 Mr Trichet says the ECB expects moderate growth, but notes “intensified” downside risks.
13.30 Mr Trichet begins his opening remarks.
12.55 This from the FT’s Frankfurt bureau chief Ralph Atkins on why the ECB is likely to proceed with caution despite calls from some economists for rate cuts:
Ralph Atkins: The increasingly pessimistic economic mood, has fuelled expectations that Mr Trichet will make clear in his press conference on Thursday afternoon that further interest rate increases are no longer on the ECB’s agenda – with some in financial markets thinking it will gradually move towards cuts in official borrowing costs, perhaps as early as November.
However, the ECB will proceed with caution. Although it is likely to revise down substantially its growth forecasts for this year and 2012, the ECB has not so far envisaged that the eurozone might fall back into recession. Stronger-than-expected German industrial production data for Germany earlier this week, suggested considerable momentum remained behind growth in Europe’s largest economy.
Large revisions to its inflation forecasts are also unlikely. In June, the ECB expected an inflation rate this year in a range with a midpoint of 2.6 per cent, falling to 1.7 per cent in 2012. Previously, however, inflation risks were seen on the “upside,” a phrase which the governing council may on Thursday have decided needs qualifying.
12.44 Sterling has risen slightly following the MPC announcement. This from the FT’s Peter Garnham:
Peter Garnham: The pound had hit a two-month low of $1.5912 this morning. Now it’s flat at $1.6000.
12.41 The National Bank of Serbia has just become the latest central bank to cut rates partly on fears over the global growth outlook:
Downward trends in inflation and inflationary pressures persist. The Executive Board assesses that low aggregate demand will continue to be a strong disinflationary factor in the coming period, which is also confirmed by the latest information on current and expected developments in the country and in the region. The Executive Board also expects stabilisation of food prices and slower growth in regulated prices.
The deepening of global economic problems remains a possibility. Concluding a precautionary arrangement with the IMF will help ease possible implications regarding the risks in some advanced economies and currency zones. Implementation of fiscal policy in line with agreed fiscal responsibility rules is of key importance for safeguarding macroeconomic stability and reducing the country risk.
12.29 Mr Trichet is not expected to signal a rate cut today. However, analysts are now forecasting the ECB to cut rates in November. This from the FT’s David Oakley and Richard Milne:
David Oakley and Richard Milne: Although many economists do not think the European Central Bank will signal rate cuts at Thursday’s press conference following the monthly rate-setting meeting, the market is predicting a 92 per cent chance of a quarter point rate cut in November.
Only a few weeks ago, the markets were predicting a slim chance of more rate hikes before the end of the year following two quarter point increases in April and July.
12.21 Analysts are split on whether more QE is likely in October. Philip Shaw of Investec says it is. But George Buckley of Deutsche Bank thinks the bar for further easing remains high.
Philip Shaw: We are pencilling in the MPC to ease next month. While shifts in policy tend to occur in Inflation Report months, which in this case might suggest November, we see few reasons to wait. Relevant dynamics include the forthcoming G7 meeting, the round of IMF gatherings in a fortnight’s time and the next scheduled FOMC decision on 21 September when we expect the Fed to launch QE3.
George Buckley: A sharp deterioration in UK prospects would be needed for the Bank to restart the programme;GDP is expected to be positive in the third quarter and the whole economy PMI remains above the 50 level [which indicates an expansion in activity]. We will be watching the evolution of the August data closely to judge the impact of sentiment on hard economic news.
12.13 Chris Giles’ thoughts on today’s decision:
Chris Giles: The Bank’s decision to do nothing and say nothing was expected by most. I find it difficult to understand. As an inflation targeting central bank, the outlook for inflation at the forecasting horizon must be a lot worse today than it was a month ago. And even then, the MPC was forecasting inflation below target in two years’ time.
It does make you wonder what the majority on the MPC think has happened to prospects since the summer. Perhaps this is a signal of resignation that the Bank feels it can do nothing to stop another downward slide in demand.
Either the MPC seems to think prospects for inflation remain as bad as they were before the recent turmoil even as the economy slides. Or they think there is nothing more they can do. Either way, it is very depressing.
12.09 The minutes of the Bank’s meeting are out on September 21. Howard Archer of IHS Global Insight says it will be very interesting to see if any other MPC members joined Adam Posen in favouring more QE:
Howard Archer: The minutes of the August MPC meeting indicated that some MPC members were increasingly thinking of voting for more QE but did not yet believe the case was strong enough. Another month of weak UK economic data and surveys, and ongoing global financial market turmoil, could well have led at least one MPC member in to joining Adam Posen. If more than one MPC member joined Mr Posen, it will point to a very real chance of QE as soon as October.
11.48 Though most still expect the Bank to hold rates and keep the size of the asset purchase programme at £200bn, the chances of more QE have risen in recent days. This from the FT’s economics editor Chris Giles:
Chris Giles: Obviously, having called for the Monetary Policy Committee to restart quantitative easing, I am hoping for fireworks shortly. A week ago, people forecasting or calling for QE2 were thought to be mad. Though far from a consensus view, many would now say a decision for QE2 was not a huge shock. That shows the degree to which the data and financial sentiment has changed.
11.40 The debate among MPC members over the past one and a half days is likely to have focused on the case for more monetary easing. This from the FT’s economics correspondent Norma Cohen:
Norma Cohen: In a radical change of direction for Bank of England policymakers, discussion at this week’s rate-setting committee meeting is likely to centre on whether further monetary stimulus will be needed.
As recently as July, two members of the Bank’s monetary policy committee – Spencer Dale, the senior economist, and Martin Weale, an external member – supported a quarter-point rise immediately to head off inflationary expectations.
In recent weeks, however, Mr Weale not only withdrew his support for higher rates but said more stimulus may be necessary in the coming months.
Economists said the discussion might not be so much about whether further stimulus was necessary, but rather on how and when to do it.
11.35 The Bank’s MPC decision is announced at noon, with the ECB governing council statement to follow at 12.45. Mr Trichet is due to speak at 13.30.
11.30 Welcome to today’s live blog. We’ll be covering the Bank’s and the ECB’s monetary policy decisions as well as ECB president Jean-Claude Trichet’s press conference.