ECB Preview

November 4, 2009

At 12:45 GMT on Thursday, the ECB is expected to announce no change in its 1.0% refinancing rate, which has been at that level since May.  Investors would also be surprised to see the disappearance of recent buzz words depicting a continuing ultra accommodative stance.  Policy is appropriate.  Although the economy is stabilizing, the recovery will be uneven, and uncertainty remains high.  Long-term inflation expectations remain firmly anchored, and monetary analysis confirms the conclusion of economic analysis that inflationary pressure will be low over the medium term.  December’s Governing Council will be more important than November’s because new staff forecasts will be unveiled, and there is a legacy of significance attached to December meetings.  The last cycle of rate hikes began in December 2005, and the monetarist-minded Bundesbank used to unveil money growth targets for the following year after its December meeting.  A rate hike is extremely doubtful before the second half of 2010, but some quantitative easing will be dismantled sooner.

Nonetheless, tomorrow’s press conference will not be entirely a mark-time event.  Euroland’s economic data reflect more momentum than ECB officials have been anticipating.  A projected GDP growth midpoint in the September forecast of 0.2% in 2009 looks too low, and CPI inflation of 1.2% is perhaps needs to be bumped higher in light of commodity price developments. Language to describe economic activity ought to be less guarded and more confident. A decision needs to be made on the conditions of long-term refinancing operations.  A third unlimited one-year refinancing tender at 1.0% is scheduled for next month.  Markets assume it will be done but increasingly believe that it may be the last one for so lengthy a maturity.  Three- and six-month auctions probably will continue, however.  As always, the answer to any questions about the euro in Q&A will be keenly picked apart, but don’t look for much, if any, comment on that issue in the formal statement.

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



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