ECB Preview: No Changes Anticipated

October 7, 2009

The ECB will not modify its 1.0% refinancing rate tomorrow.  The policy announcement is due at 11:45 GMT.  325 bps of reduction were squeezed into seven moves, beginning exactly one year ago and ending with a 25-bp cut on May 7.  I expect ECB President Trichet to reiterate that the present stance is “appropriate” and for him not to announce any modification of plans to undertake a third quarterly tender of unlimited 12-month funds in December at the 1.0% refinancing rate.  The overnight euribor rate is just 0.27% as a result of the ECB’s generous stimulus.  Trichet will predict a return to positive on-year consumer price inflation fairly soon and declare that expected inflation in the medium term remains anchored near the central bank’s target of below but close to 2%.  Both monetary and economic developments point to low pricing pressure next year.

Comments over the past five weeks by ECB officials have been guarded about economic prospects.  No imminent changes have been foreshadowed.  A return to positive growth in the second half of 2009 meanwhile reflects a boost from inventories and fiscal stimulus to a large extent, and officials have backed away from declaring that sustainable recovery has arrived.  Starting to tighten policy now would be imprudent.  Officials have, however, suggested that when the time is right to begin the exit, unconventional measures will be modified before rates are raised.  September PMI scores in Euroland of 51.1 on the composite index, 50.9 for services and 49.3 in manufacturing were each higher than in August, but the rate of improvement has flattened.  A 0.2% drop in August retail sales was disappointing.  So was a 0.3% drop in July industrial production.  The 16-nation bloc now has a 9.6% unemployment rate, two percentage points higher than a year ago, and it will continue to crest.  Real GDP in 2Q was revised to a fractionally greater dip of 0.2% from 1Q and a 4.8% plunge from a year earlier.  The IMF is forecasting average positive growth in Euroland of only 0.3% next year.  Last month’s quarterly forecast from the ECB staff put GDP growth in 2010 somewhere within a range from minus 0.5% to positive 0.9%.  One bright spot has been the revival of industrial orders which advanced by 2.6% in July.  Germany today reported that its orders climbed 1.4% in August on top of a 3.1% advance in July.  However, a finding from the PMI survey in manufacturing was that export orders are beginning to feel the pinch from euro appreciation.  In the five weeks since the ECB met on September 3rd, the euro has risen 2.6% against the dollar and another 1.7% against its trade-weighted index.  Trichet is likely to be asked about the dollar at Thursday’s press conference and to indicate the importance of a strong dollar. 

The DAX has gained slightly over 4%, and ten-year bund yields fell 12 basis points since the September policy meeting.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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