06 April 2009

EZA 890 Report: ECB Observer

ECB 2 April Council Post-Meeting Assessment

 · The ECB on 2 April cut all three of its key interest rates by 25 basis points, taking its main refinancing rate to 1.25% and its marginal lending and deposit facility rates to 2.25% and 0.25% respectively, taking the total cut since October 2008 to 300 basis points.

· ECB sees 0.25% as lower bound for deposit rate but 1.25% not lower limit for 'refi' rate, with narrowing of corridor not ruled out, but any future rate cuts would be 'measured'.

· Governing Council commits to announce new 'non-standard' credit-enhancing measures, focused particularly on banks, next month.

· Inflation expected to become negative in mid-2009 before increasing again, remaining below 2.0% in 2010, while inflation expectations remain firmly anchored.

· Economic activity seen very weak in 2009Q1, remaining very subdued in rest of 2009 but recovering gradually in 2010, with risks to this 'broadly balanced'.

 EZA Conclusion: Any further interest rate action would entail a reduction in the deposit/'refi' rate corridor below 1%. A decision to extend maturity of longer-term refinancing operations with the banking system must be the front runner for the May announcement on new 'non-standard' measures, with a debate probably currently still to be completed on whether also to go for outright purchases of commercial paper and whether to couple the May announcement with a further reduction in the 'refi' rate and narrowing of the deposit/'refi' interest rate corridor.
 

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