• The ECB’s weekly main refinancing operations and the one-month auctions will continue to be with full allotment at least until 12 October 2010. That the ECB promised to give full allotment for such a long period was today’s big surprise. For the three-month auctions the ECB is moving to fixed allotment.
  • The last 6-month auction will be at a rate indexed to the refinancing rate. This will not matter much though, as the refinancing rate is expected to remain unchanged for at least 6 months.
  • The ECB’s assessment of the economic situation continues to become slightly more positive and Trichet emphasised that the current poor data is partly due to bad weather. Nevertheless, we still find that the ECB is too downbeat and we expect further upward revisions in June.
  • The ECB expects inflationary pressures to be low. In their inflation projection, the upper end of their band for 2011 is nevertheless 2.1 %. They will not have to revise inflation expectations much upward before they can defend to move away from record low interest rates.
  • The ECB is determined to move towards the exit, but at a slow pace. We expect that the ECB will move to fixed allotment at the one-month auctions in October and for the main refinancing rates at end-2010 at the latest (most likely in October too).
  • The market reaction was for rates to rise 2-3bps higher across the curve. This may partly be driven by good US initial jobless claims coming out at 14:30.

The ECB is heading towards the exit at a slow pace

The 3-month auctions will be with fixed allotment from now on. The ECB’s weekly main refinancing operations and the one-month auctions will continue to be with full allotment at least until 12 October 2010. It was a surprise that the ECB gave a promise for such a long period. It will reduce demand at the final six-month auction. We expect that the ECB will move to fixed allotment at the one-month auctions in October and for the main refinancing rates at end-2010 at the latest (most likely in October too). The ECB will then be back to its normal set-up.