During the last’s week press conference, the ECB’s president Jean Claude Trichet did not offered main item of interest, except confirming that the incipient economic recovery could be slightly better than expected. Mr Trichet also announced a slight upward revision of the Eurostaff Economists’ growth’s estimates in September.
The expectations that during the press conference Mr Trichet would have indicated some news about the future “exit strategy" from the strong monetary stimulus implemented in recent months were disappointed.
Notwithstanding the interest on the way the exit strategy will be carry out is very high, the moment of its implementation appears far from close.
Indeed, even if some positive macroeconomic data in the last few weeks have showed that the worse of the economic crisis might be behind us, other economic data have continued to indicate that the health of the major Eurozone economies remains very weak.
The main business and consumer confidence indexes, considered good leading indicators for the business cycle in the Euro area, have recorded signs of improvement from the low levels recorded at the beginning of the year but they have remained well below the historical average levels. As an example, the European Commission’s Economic Sentiment Index fell to an all time low at 60.4 in March and has recorded 4 consecutive increases since then, rising to 75 in July. However, this value is only slightly higher than the previous historical low at 74,2 recorded in 1992. The ECB’s tightening monetary policy in November '99 and December '05 began with the index above 100.
Furthermore, economic data better than expected, such as the surge of German industrial orders in June (+4.5% MoM, but -25.3% YoY), have come in coincidence with disappointing data, as the decline in June’s retail sales in the Eurozone and the fall of the Italian industrial production in June (-1.2% MoM and -21 , 9% YoY). The more disappointing pieces of news came from the fall in June’s German industrial production (-0.1% MoM versus consensus of +0.5% MoM).
Therefore, the recent published data have confirmed that the Refi rate should remain on a very low level for a long time. A useful benchmark for understanding the monetary policy’s perspective, the Taylor rule, illustrates that the need to raise rates should be present only in many quarters.
A tightening role for the Eurozone economy has been played since last March by the single European currency’s increase. Our monetary condition index, which consider the real exchange rate and short-term rates’ trend, remains well above the long-term historical average and it is likely to worsen in the coming months in the case of a further Euro’s increase and/or in the case of an inflation rebound, as penciled in by the ECB. The negative effect of the Euro’s rise against major international currencies on European economic growth was studied by the major international agencies. For example, the IMF estimated that a 10% increase in the Euro real exchange rate is followed by a lower economic growth between 0.25% and 0.75%.
Therefore, the upward trend of the Euro/Dollar could play a key role in the next ECB’s moves. It is no coincidence that Mr Trichet said during the last press conference that he considered appropriate the Fed chairman Bernanke and the US Treasury secretary Geithners’ statements in favor of a strong US Dollar.
Overall, the ECB’s monetary policy decisions could be influenced by the developments of the Euro should the international economies’ recovery be temporary, with the economy following a W-shaped profile (i.e. a rebound followed by a brief contraction and a growth in the future), as recently suggested by the professor of economics at New York University Nouriel Roubini, and not a V shaped profile. The fact that the recovery process has been led by strong fiscal and monetary stimulus, while many economic imbalances that have caused the crisis are far from being solved, makes it almost impossible that can be placed the end word on the international crisis in the short term. In this case, with a Euro strengthened against the US Dollar well above the Purchasing Power Parity estimated by the OECD (at 1,17), it is not excluded that the ECB might be forced to implement a new monetary stimulus well before they could implement any exit strategy.
The expectations that during the press conference Mr Trichet would have indicated some news about the future “exit strategy" from the strong monetary stimulus implemented in recent months were disappointed.
Notwithstanding the interest on the way the exit strategy will be carry out is very high, the moment of its implementation appears far from close.
Indeed, even if some positive macroeconomic data in the last few weeks have showed that the worse of the economic crisis might be behind us, other economic data have continued to indicate that the health of the major Eurozone economies remains very weak.
The main business and consumer confidence indexes, considered good leading indicators for the business cycle in the Euro area, have recorded signs of improvement from the low levels recorded at the beginning of the year but they have remained well below the historical average levels. As an example, the European Commission’s Economic Sentiment Index fell to an all time low at 60.4 in March and has recorded 4 consecutive increases since then, rising to 75 in July. However, this value is only slightly higher than the previous historical low at 74,2 recorded in 1992. The ECB’s tightening monetary policy in November '99 and December '05 began with the index above 100.
Furthermore, economic data better than expected, such as the surge of German industrial orders in June (+4.5% MoM, but -25.3% YoY), have come in coincidence with disappointing data, as the decline in June’s retail sales in the Eurozone and the fall of the Italian industrial production in June (-1.2% MoM and -21 , 9% YoY). The more disappointing pieces of news came from the fall in June’s German industrial production (-0.1% MoM versus consensus of +0.5% MoM).
Therefore, the recent published data have confirmed that the Refi rate should remain on a very low level for a long time. A useful benchmark for understanding the monetary policy’s perspective, the Taylor rule, illustrates that the need to raise rates should be present only in many quarters.
A tightening role for the Eurozone economy has been played since last March by the single European currency’s increase. Our monetary condition index, which consider the real exchange rate and short-term rates’ trend, remains well above the long-term historical average and it is likely to worsen in the coming months in the case of a further Euro’s increase and/or in the case of an inflation rebound, as penciled in by the ECB. The negative effect of the Euro’s rise against major international currencies on European economic growth was studied by the major international agencies. For example, the IMF estimated that a 10% increase in the Euro real exchange rate is followed by a lower economic growth between 0.25% and 0.75%.
Therefore, the upward trend of the Euro/Dollar could play a key role in the next ECB’s moves. It is no coincidence that Mr Trichet said during the last press conference that he considered appropriate the Fed chairman Bernanke and the US Treasury secretary Geithners’ statements in favor of a strong US Dollar.
Overall, the ECB’s monetary policy decisions could be influenced by the developments of the Euro should the international economies’ recovery be temporary, with the economy following a W-shaped profile (i.e. a rebound followed by a brief contraction and a growth in the future), as recently suggested by the professor of economics at New York University Nouriel Roubini, and not a V shaped profile. The fact that the recovery process has been led by strong fiscal and monetary stimulus, while many economic imbalances that have caused the crisis are far from being solved, makes it almost impossible that can be placed the end word on the international crisis in the short term. In this case, with a Euro strengthened against the US Dollar well above the Purchasing Power Parity estimated by the OECD (at 1,17), it is not excluded that the ECB might be forced to implement a new monetary stimulus well before they could implement any exit strategy.
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