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ECB Review: no surprises

Thu, Jun 4 2009, 14:20 GMT
by UniCredit Research

UniCredit Group

As expected, the ECB left all the rates unchanged, with the refi standing at 1.00%, and unveiled the relevant details of the upcoming covered bonds purchase program. The main points of today’s press conference are.

On the "traditional" monetary policy front:

• The ECB confirms that the 1.0% refi rate level is appropriate at this time, but also that it is not a pre-decided floor. We still believe rates will remain at 1.0%, as long as that the ECB’s (and our) baseline scenario holds.
• Staff forecasts were on the dovish side.
  The main surprises were the downward revision to the 2010 GDP call (now at -0.3% vs. flat in March), accompanied by the statement that the euro area won’t resume positive growth before mid-2010.
  
• HICP projections were broadly in line with expectations. The ECB sees inflation averaging 0.3% this year (vs. 0.4% in March) and 1.0% in 2010 (unchanged from three months ago). More important, the key first paragraph of the statement reads that price pressures will remain moderate over the policy-relevant horizon. The ECB sees inflation returning positive by the end of this year, a bit later than we expect.
• The ECB still attributes the ongoing credit slowdown mostly to lower demand, noting that it is mainly short-term credit that is contracting – because of a lower working capital’s need by firms – whereas long-term funding keeps growing. The ECB however acknowledged that firms are making greater use of liquidity buffers.
• The ECB reiterated its commitment to a timely exit strategy :
  extraordinary measures will be unwound as soon as the first signs of stabilization emerge.

On the EUR 60bn covered bond purchase program:

• Purchases will be carried out in both primary and secondary market with banks participating in the ECB refinancing scheme;
• It will regard instruments already accepted as collateral. Bonds must have as a rule a volume of about 500 mn euros or more and in any case not lower than 100 mn euros. Moreover, they must have as a rule a minimum rating of AA by at least one of the major rating agencies, and in any case not lower than BBB/Baa3;
• The purchase program will start in July 2009 and will be fully implemented by June 2010. As we have already flagged recently, the ECB will concentrate on 3-10Y maturities, given that that is the most relevant bucket of the lending curve.
• Trichet sounded a bit vague on sterilization.
  Pressed on the issue, he said he expects automatic sterilization (presumably as banks which sell assets to the ECB would reduce their demand for liquidity at other facilities), and that if this does not take place, the ECB would take appropriate action. This suggests purchases will be sterilized, but remains shy of an explicit statement in this regard, suggesting the ECB wants to keep some room for manoeuvre.

Published on  Thu, Jun 4 2009, 14:25 GMT