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Prospects Daily: ECB keeps benchmark rates unchanged, while German industrial production fell by 2.2% (m/m) in April

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Important developments today:

1. ECB keeps benchmark rates unchanged despite rising pressure for cut

2. German industrial production fell by 2.2% (m/m) in April


ECB keeps benchmark rates unchanged despite rising pressure for cut. The European Central Bank (ECB) left its key interest rates on hold even as the region’s deepening debt crisis increased pressures on policy makers for further monetary stimulus. The ECB’s regular policy meeting in Frankfurt on Wednesday voted to keep the rate for its main refinancing operations at a record low of 1 percent, leaving the rates where they have been since last December. Amid mounting pressure on the bank to stimulate a weakening Euro Area economy, ECB president Mario Draghi said last week that the central bank cannot “fill the vacuum” created by governments’ inaction. The euro and European stocks markets advanced after the decision. The shared currency strengthened 0.5% to 98.45 yen, gaining for a fourth day, and it gained 0.2% to $1.2476. The benchmark Stoxx Europe Index climbed 1.2% in afternoon trading, the most gain since May 22nd.

German industrial production fell by 2.2% (m/m) in April, its largest monthly decline in three years, suggesting that the Euro Area’s largest economy is being impacted by the ongoing debt crisis in the region [see Chart at http://prospects or]. Indeed, the latest ZEW economic sentiment index fell sharply in May (from 23 to 10) and Markit’s latest  Purchasing Managers’ Index showed manufacturing activity (index value of 45.2) to be at the weakest level in three years. Though German industrial output slumped in April, it is however important to recognize that output rebounded strongly in March, hence on a three-month moving average basis German industrial production actually increased at an annualized pace of 0.4%. However, if the April slump persists through Q2 then, unlike Q1 where German output growth helped the Euro Area escape a second consecutive quarter of negative growth, the Euro Area economy will most likely contract in Q2. Today the European Central Bank (ECB) left its policy rate unchanged, however the President of the Bank noted that the ECB stands ready to act in an environment of increased downside risks.

Among Emerging Markets

In Latin America and Caribbean, consumer price inflation in Brazil as measured by the benchmark IPCA index slowed to 4.99% year-on-year (y/y) in May, its lowest level in 20 months, from 5.1% in April, mainly reflecting weakening domestic demand and a deteriorating outlook for growth for this year after output expanded just 0.8% (y/y) in the first quarter of 2012. This is the first time that inflation has fallen below 5% since September 2010 despite demand stimulus measures and several rounds of monetary easing in recent months, with the benchmark Selic rate cut by a cumulative 400 basis points since August 2011. Inflation, however, remains above the 4.5% midpoint of the central bank’s target range.

In South Asia, consumer price inflation in Pakistan continued its upward trend rising to 12.3% year-on-year (y/y) in May, its highest level in almost a year, from 11.3% in April, with pressures coming from food price increases and an uptick in core inflation (excluding food and energy), suggesting persistent capacity constraints. The central bank has kept its benchmark discount rate unchanged at 12 percent this year, after cutting it by 2 percentage points last year.

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