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Preview: ECB November rate decision and press conference

Thu, Nov 5 2009, 10:18 GMT
by RANsquawk Research Team

RANsquawk

Rates currently at 1.00% with all analysts look for no change today at 1245GMT

Focus will be on press conference at 1330GMT

Latest non-event from the ECB

In today’s meeting the ECB is expected to keep interest rates unchanged at 1% and signal that financial armageddon has been avoided but the path towards recovery is yet to find firm footing. As such, the press conference will be scrutinised for potential changes in the stance regarding the monetary policy given latest improvements in economic indicators across the Euro zone. However, those looking for Trichet to echo an optimistic outlook may be disappointed, as the head of the ECB continues to manage public expectations and keep to his prudent approach. To sum it up, the ECB will again buy time by saying nothing and leaving the decisions to December when the central bankers will be armed with the latest projections for growth and inflation.

Although the calamity in the markets has eased, Trichet is expected to play down a speedy recovery and say that uncertainty remains high, while calling for members to be alert and vigilant. Given that the ECB does not precommit on policy is it vital to keep an eye on language used by Trichet. Absence of statement such as rates are at ‘appropriate level’ may heighten speculation of a possible split in the ECB camp and send jitters around the market.

The M3 money supply remains depressed, while unemployment is expected to remain on an upward trend. Also, the EU banking sector remains fragile and could see additional EUR 200-400bln more in bank losses in 2009/10.This prompted a possibility of a fresh wave of credit crunch heading for the Eurozone. It looks as though deflation and not inflation, remains a threat to the Eurozone economy and a particular risk in Ireland and Spain. Germany and France appear to be in the least danger of deflation. This divergence in economic performance puts the ECB into difficult situation and it will be vital for the ECB to remove the accommodative policy when the time is right and avoid creating new asset bubbles. Trichet is likely to use the press conference to suppress any fears of deflation. He is expected to argue that the negative inflation was expected given lower energy prices and in the medium term, deflation is not seen as a great concern especially if the economy begins to show signs of recovery.

ECB puts an end to easy money?

Analysts also hope that Trichet will use the press conference to reveal details and hints on the next one-year tender which is scheduled for December. Governing Council member Axel Weber has already hinted that December is likely to be the ECB's final injection of one-year cash. However, the crisis is not over and the ECB may feel it needs to stay in expansionary mode until it is 100% convinced of a firm recovery. But signals that it is prepared to add a spread to the previous 1% (making the tender more expensive) will be interpreted as hawkish and would pressure Euribor, while conversely giving a lift to the EUR. Also the majority of the measures the ECB has devised to fight the recession are only guaranteed into January. As such, the ECB must choose whether to renew the program or end them. It may also be viewed hawkish should Trichet signal that the governing council feels that there is no need to reinstate the liquidity measures.

Exit doors are still out of reach

Lately, exit strategies have become a popular topic for discussion, however any firm pre-commitments on this topic is unexpected in today’s meeting. Nevertheless, unconventional monetary expansion may require unconventional monetary tightening. Still, it may be too early to discuss such events and instead it may be logical to look for usual message that rates are appropriate.

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Published on  Thu, Nov 5 2009, 10:21 GMT