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ECB: Trichet hints at June rate hike
Fri, Apr 13 2007, 07:23 GMT
by KBC Market Research Desk
- ECB leaves rates unchanged at 3.75%
- Statement very similar to March
- Markets expectations towards June rate hike validated
- No hints on what to expect further out, but markets continue to raise rate hike expectations
Following the March rate hike to 3.75%, the ECB governing council kept rates unchanged at its April policy meeting. The tone of the introductory statement and press conference was very similar to the one in March. As such, the ECB remains on track for a rate hike in June to 4%, as was confirmed by Trichet during the press conference.
Statement very similar to March
The ECB still expects ongoing robust growth in the euro area and still sees the risks for price stability on the upside. This analysis was also confirmed by the monetary analysis, even while Trichet acknowledged that the annual growth rate of loans to the private sector showed some further signs of moderation. Trichet admitted that in contrast to previous months the moderation was not only reflected in a decline in the growth rate of household borrowing, but also in the growth of loans to non-financial corporations. Even while he did not want to overstate the moderation, it’s one of the first signs that higher interest rates are having some impact on the economy, albeit still limited. Hence, Trichet concluded that liquidity is still ample by all plausible measures and points to upside risks to price stability over the medium to longer term. The notice of the ECB of the moderation in lending will put some more emphasis on the counterparts of M3 growth in the coming months.
Regarding the outlook for ECB rates, Trichet said that he would not say anything that would be aimed at changing expectations for June. As such, he validated current expectations for a June rate hike to 4%. As regards market expectations beyond June, Trichet did not want to speak out. The opening statement provided some ammunition for both the believers and non-believers, as Trichet repeated that rates are no longer ‘low’ but ‘moderate’ and that monetary policy is no longer ‘accommodative’ but ‘on the accommodative side’ as well as that ‘acting in a firm and timely manner remains warranted’. As such, the question how high ECB rates will rise this cycle is still open for debate.
Markets raise rate hike expectations
Following the press conference, the bearish sentiment prevailed on the European bond market. As a result, 2-year yields rose further above the 4% level, while 10-year yields broke above the 2006 highs at 4.15%. This paints an inverse head and shoulder formation on the screens with the targets at 4.43% and 4.66%. At the short end of the curve, we remain rather defensive, as there are still some good reasons why the ECB may pause at 4%, even while we admit that the risks are building on the upside.
Published on Fri, Apr 13 2007, 07:27 GMT
KBC Bank
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http://www.kbc.be/dealingroom | piet.lammens@kbc.be
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