11 May 2009

EZA 895 Report: ECB Observer

ECB 7 May Council Post-Meeting Assessment

· The ECB on 7 May cut its key main refinancing rate by 25 basis points and narrowed its deposit/lending rate corridor to +/- 0.75% around this

· Governing Council does not see any of these 3 rates as necessarily at their lower limit, but expected downgrading of growth forecast in June already factored in to present rate cut.

· New non-conventional easing measures include extension of maturity of longer-term refinancing operations to 12 months and outright purchases of covered bonds.

· 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: On present form, a further cut in ECB rates seems unlikely on 4 June, but the relatively modest scale of these new 'enhanced credit support' measures suggests that, if all that is now in the pipeline does not do the trick, further 'credit support', or even 'quantitative easing', measures as well as another rate cut in a few months' time can not be ruled out.
 

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