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European Central Bank Blames Asian Slowdown For Weak Growth

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The much anticipated European Central Bank’s press conference began at 2:30 pm CET. Mario Draghi, President of the ECB, opened with an introductory statement. In anticipation of the European Central Bank’s announcements, European stocks rallied and the euro had a good couple of weeks.  Draghi had previously announced that the establishment would do anything to save the Euro. Draghi repeated his earlier statement today, “We act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.”

European Central Bank Blames Asian Slowdown For Weak Growth

The Governing council had earlier decided to stick to the interest rate of 1.00%, 1.75%, and 0.25% on the main refinancing operations and the interest rates on the marginal lending facility respectively. Draghi’s comments on these decisions during the press conference were:

  • The decision in interest rates was made owing to the  high energy prices and increases in indirect taxes in some Euro countries.
  • Inflation is expected to stay above 2% for the rest of the year.
  • Eurozone real GDP contracted by 0.2 percent on q-o-q basis in the Q2 2012. In Q1 there was zero growth.
  • Economic indicators are weakened throughout 2012, Euro economy will only recover gradually.
  • Growth will be dampened as balance sheet adjustment are made in the financial and non financial institutions.
  • Euro area annual HICP inflation was 2.6 percent till Aug 2012 (esfe) compared with 2.4 percent in the previous month. The increase is due to increase in Euro denominated energy prices
  • Inflation rates are expected to decline below 2 percent in the coming year
  • Revised Higher Sep 2012 projections: Annual HICP inflation for 2012. 2.4- 2.6 For 2012: 1.3-2.5.
  • GDP Growth Projections: -0.6% to -0.2% for 2012 and -0.4% to 1.4% for 2013
  •  The annual growth rate of M3 increased to 3.8% in July 2012, up from 3.2% in June.
  • ECB announced  Outright Monetary Transactions (OMTs), a mechanism that will safeguard a unified  monetary policy for the Eurozone’s transactions in the secondary sovereign bond markets. This will require compliance with the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) program, IMF will also be involved to ensure adherence. There is quantitative limit on the size of OMTs. After the announcement of OMTs, the Securities Markets Programme (SMP) will be discontinued.

The European central bank’s decision today was not entirely unanimous, in reply to one reporter’s (Observer UK) question, Draghi replied that there was one dissenting view in board. The European Central Bank, stresses the need for fiscal consolidation and structural reforms. The bank also encourages governments to adhere to EFSF/ESM in the bond market. Risks to price development continued to be broadly balanced over the medium term. The European Central Banks’ President also said that weaker than expected growth in the Eurozone was due to the slowdown in Asian markets.

Markets were not happy with the results, the Dow Jones Industrial Average is up 150 points on the news. The Dow Jones Industrial Average is close to a record for the year of 132,000 on the news. The Euro is now at a two month high with the EUR/USD at 1.2638.


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