19 January 2010

EZA Report 929: ECB Observer

EZA929/18Jan2010: ECB 14 January Council Post-Meeting Assessment

·     As generally expected, the ECB kept its key rates unchanged at its 14 January meeting, leaving the 'refi' rate at 1% for the ninth month in a row.

·     Activity continued to expand towards the end of 2009, but still dependent on temporary factors and, while positive quarterly growth is expected this year, balance sheet constraints and rising unemployment will weigh on growth, with road ahead still bumpy.

·    Inflation, turning positive in November, rose to 0.9% in December with further positive year-ago base effects, but expected to remain around 1% for some time to come.

·    Negative growth of both M3 and credit to private sector likely to continue for some time, supporting assessment of decelerating monetary expansion and inflationary pressures.

·    ECB sees short-term market interest rising within the 1/2%-1 1/12% official rate corridor once special liquidity procedures modified, but no hints on future official rate increases.

EZA Conclusion: The ECB is not likely to start raising rates before mid-2010 and is likely to want to see how market interest rates respond to the progressive withdrawal of its special support measures from April, especially when the EUR 442 bn 12-month LTRO matures on 1 July along with the special smoothing operations that will be required around that time, before it reverts progressively to a more neutral interest rate stance, with 25 bp hikes likely in September and December, taking the 'refi' rate to 1.5% by end-2010.

Please see the attached our regular analysis from John Arrowsmith as a pdf file to read onscreen or simply print and read at your convenience.

John Arrowsmith: ECB / Regulatory

Tel: +44 7720 59 1726

john.arrowsmith@eurozoneadvisors.com

Discussion Partners

John Arrowsmith: ECB / Regulatory

Tel: +44 7720 59 1726

john.arrowsmith@eurozoneadvisors.com

Dr Michael Clauss: Germany Politics / Economy / Equities Sectoral Analysis
Tel: +49 89 64254046

michael.clauss@eurozoneadvisors.com

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