03 June 2009

EZA 898 Report: ECB Observer

ECB 4 June Council Preview
 

NO RATE CUT SEEN THURSDAY, OR FOR NEXT FEW MONTHS, BUT DETAILS OF PROMISED COVERED BOND PURCHASE SCHEME TO BE AGREED AND ANNOUNCED

· Confirmation of sharp deepening of recession in Q1 but growing signs in Q2 that trough might soon be in sight.

· 'Headline' inflation drops to zero but 'core' inflation edges back up.

· Money market tensions ease a little more, but money and credit growth continue to slow.

· Governing Council focus this time likely to be on technical details of covered bond purchase scheme, rather than further rate cuts, and on eventual exit strategies.

In EZA's view, no further rate cut will be announced this week. Instead, much will be made by Trichet at his press conference about the details of the covered bond purchase scheme and about the overall scale of the unconventional credit easing measures now in place. The Governing Council will switch into wait-and-see mode as all these measures, together with the 325 basis point reduction in the 'refi' rate over the past eight month, work their way through the monetary policy transmission mechanism. Barring any serious accidents on the growth, inflation or financial market fronts, we expect interest rates now to stay on hold through the summer and perhaps even up to the year-end.
 

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