Awaiting New ECB Forecasts Thursday And Other Critical Information

December 2, 2009

At 12:45 GMT Thursday, the ECB will announce no changes in the 1.0% short-term refinancing rate, nor in the 0.25% deposit rate or the 1.75% marginal lending rate.  That’s been the rate structure since last May and is unlikely to get modified before late 2010.  If asked at the press conference that starts at 13:30 GMT, President Trichet will say the decision to keep these rates was unanimous.  A statement from the central bank will include many familiar phrases, calling present policy appropriate and indications of expected consumer price inflation well-anchored and consistent with the Bank’s target of below but close to 2%.  Recent economic developments will be characterized as being within staff expectations and leaving the baseline forecast of a gradually-paced recovery and sub-target but positive inflation intact.  The main task of Thursday’s press conference is to flesh out some details for how non-standard forms of stimulus are to withdrawn without engendering expectations of a near-term or even medium-term rise in the Bank’s interest rates.  High uncertainty will again be stressed, as the arduous process of global deleveraging continues.

New staff forecasts will be released, and like every December such will be extended out an additional year — in this case to 2011.  Because of higher third-quarter growth than assumed last September and indications of continuing momentum in the present quarter, projected 2010 GDP, whose range in the September forecast centered on +0.2%, will get revised closer to 1%.  CPI inflation may get revised up, too, but to a much more marginal extent.  The new 2011 projections will probably lie below 2% for both growth and prices, and in the latter case still be under target.  The table below summarizes the history of previous staff forecast ranges, which are released quarterly.  The left-most column indicates the month when each forecast in that row was made.

  GDP ’09 GDP ’10 CPI ’09 CPI ’10
09/09 -4.4/-3.8% -0.5/+0.9% +0.2/0.6% +0.8/1.6%
06/09 -5.1/-4.1% -1.0/+0.4% +0.1/0.5% +0.6/1.4%
03/09 -3.2/-2.2% -0.7/+0.7% +0.1/0.7% +0.6/1.4%
12/08 -1.0/0.0% +0.5/1.0% +1.1/1.7% +1.5/2.1%
09/08 +0.6/0.8%   +2.3/2.9%  
06/08 +1.0/2.0%   +1.8/3.0%  
03/08 +1.3/2.3%   +1.5/2.7%  
12/07 +1.6/2.6%   +1.2/2.4%  


The main news Thursday will concern what officials announce about changes in unconventional liquidity-providing facilities.  Market participants anticipate:

  1. Confirmation that no 12-month refinancing tenders are planned in 2010.  The last one on December 16, two weeks from today, should be unlimited and at a fixed rate like those that supplied EUR 442 billion last June and EUR 75 billion in September.  Most market players expect the rate to be 1.0% at least at first, but Trichet in November would not rule out the possibility of a spread above 1% or indexing of the rate to the short-term refinancing rate.
  2. Short-term refinancing operations (one-month or less) should remains fixed tenders during the first quarter of 2010.
  3. The ECB will likely conduct longer-termed 3- and 6-month refinancing tenders less often next quarter than their current frequency of every month.  It’s possible that these will also be modified to variable-rate tenders where the central bank and not the market sets the amount of liquidity provided.
  4. An announcement about fewer bond purchases also may be made.
  5. All the changes will be presented as a cautious end to emergency steps that are no longer needed but not the beginning of outright policy tightening

Officials do not want overnight euribor rates, presently around 0.30%, to drift far above the ECB deposit rate of 0.25% especially through the yearend period but also early next year.  Three-month rates are presently at 0.68%, but six-month and 12-month rates are respectively hovering around the 1% refinancing rate and at almost 1.25%.  That structure suggests that markets are prepared for rate hikes to begin anytime in 2H10.  If Trichet communicates the message that I think he’d like to send at this juncture, that path will not move forward to an earlier-timed onset of increases.  To do that may require the ECB president to use language that generates press headlines that proclaim Trichet a little less hawkish than than analysts were anticipating.

Mr. Trichet may be asked another question about the euro, dollar, yen or yuan.  When this happened at the November conference, he responded as he has done before that his views are captured in the G-7 statements to which he is a party and add that he finds U.S. official expressions about the importance of a strong dollar to be useful.  EUR/USD was $1.4848 at the time of the November policy meeting, not much different from now, and I expect him to break no new ground on foreign exchange policy.  Japanese officials are trying to secure momentum for coordinated G-7 intervention, but I doubt they get takers.

Prior to locking in the current ECB rates, the central bank had cut a peak refinancing rate of 4.25% by 50 basis points in October 2008, another 50 bps in November, 75 bps in December, 50 bps each in January and March, and finally 25 bps each in April and May.

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



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