- Updated with Bernanke Comments. Bernanke Talks, Dollar Tanks. Euro breaks 1.48
The European Central Bank left interest rates unchanged this morning at 4.00 percent. They have not backed off their commitment to preventing second round effects, which has been very positive for the Euro. Regardless of whether the central bank will raise interest rates next month, they stand ready to do so. According to ECB President Trichet, there are only 2 options – to leave interest rates unchanged or to raise them. Compare that with the options available to the Federal Reserve or the Bank of England and it clear why the EUR/USD is above 1.47 and EUR/GBP is trading at a new record high. BERNANKE COMMENTS
Bernanke's comments on the economy triggered a wave of dollar selling because he confirmed that additional easing is necessary and warned that the risks to 2008 growth has increased signficantly. As you can see by the highlights of his comments, the Federal Reserve Governor barely talked about inflation and instead focused primarily on the outlook for growth, which heexpects to slow in 2008.
- Further ‘Policy easing may well be necessary.’
- Financial conditions pose downside growth risk.
- TAF may become ‘useful permanent’ tool.
- 2008 outlook worsened, risks ‘more pronounced.’
- Housing demand ‘weakened further.’
- Fed ‘paying particular attention’ to housing.
- Fed to monitor inflation, price expectations.
- Jobs deterioration would raise spending risk.
- December job data ‘disappointing.’
- ‘Prepared’ to ‘act in a decisive and timely manner.’
- ‘Additional policy easing may well be necessary.’
Here is a list of all of the key comments made by Trichet in this morning’s press conference.
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TRICHET COMMENTS
On Monetary Policy
- 2-Pillar strategy very pertinent at moment.
- Ready to act ‘preemptively’ on rates.
- Ready to quell inflation.
- ECB will do what is needed to contain inflation.
- Trichet, asked if has tightening bias, won’t correct that. Says stance is certainly not neutral.
- Trichet, asked about rate cut, says only 2 options discussed.
- ECB discussed pros and cons of raising rates.
- ECB discusses pros and cons of various options and weighed all pros and cons ‘very very carefully.’
- ECB decision was reached by consensus.
- Mandate is absolutely clear, which is price stability in the medium term.
- ECB is in position of ‘total alertness.’
- ECB not in position to engage in trade-offs.
- Trichet says ECB to publish bank survey Jan 18.
On Inflation
- Won’t ‘tolerate the start of second-round effects.”
- When second-round effects appear it’s too late.
- Clear message is no second-round effects.
- Trichet says we’re warning wage-setters in advance. Decision makers must prevent wage-price spiral.
- Wage increases among upside inflation risks.
- ‘Imperative’ all parties avoid second-round effects.
- Trichet says ECB is monitoring euro-area wage talks closely.
- Anchoring price expectations is of ‘highest priority.’
- Sees upside prices risk in medium term. Inflation outlook lie on upside
- Inflation forecasts assume no second-round effect.
- Inflation to remain significantly above 2%.
- Inflation to moderate gradually during 2008.
- Oil, commodities, imbalances are risks.
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On Growth
- Risk to baseline scenario are on downside.
- Downside growth risks ‘remain high.’
- Baseline scenario of ongoing growth remains.
- Mixed signals from economy.
- Reforms needed to boost growth, jobs. Governments must step up their reform efforts.
- Impact of market turmoil on economy still uncertain.
- Emerging markets to mitigate U.S. slowdown.
- Global economy should remain resilient.
- Consumption should contribute to economic growth.
- Jobless rate at levels not seen for 25 years.
- ECB main scenario is for growth around potential.
- Data suggest 4Q growth moderated from 3Q.
- Risk to economic outlook on downside.
- Euro-area economic fundamentals remain sound.
- ECB will monitor very closely all developments.
On Financial Markets
- Situation is ‘very difficult.’
- ECB distinguishes between liquidity and solvency.
- ECB not responsible for solvency problems.
- ECB will take care of short-term market rates.
- ECB will offer $10B of 28-day cash.
- ECB dollar operations to be same size as Dec. ECB, Fed to offer more dollar liquidity in Jan.
- ECB made money from market liquidity operations.
- Growth of bank loans to private sector ‘robust.’
- M3 developments need ‘very careful monitoring.’
- Underlying rate of monetary expansion is ‘strong.’
- M3 growth likely affected by money-market turmoil.
- M3 growth confirms medium-term price risks.
- Money, credit continue to grow vigorously.
Contact Kathy Lien about this article at [email protected]
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