· As expected, the ECB kept its key rates unchanged at its 4 February meeting, leaving the 'refi' rate at 1% for the tenth month in a row.
· Activity continued to expand around the turn of the year, but was still dependent on temporary factors which will unwind.
· Growth in 2010, dampened by balance sheet adjustments, low capacity utilisation and rising unemployment, is expected to be 'only moderate' and the recovery uneven.
· 'Headline' inflation, increasing from 0.9% to 1.0% in January, is expected to stay around 1% in the near term and to remain moderate over the policy-relevant time horizon.
· Underlying pace of monetary expansion still seen as moderate, despite negative annual M3 growth rate in December.
· Zero annual growth rate of lending to private sector conceals further rise in lending to households and continuing increase in longer-term loans to non-financial corporations.
· Trichet endorses Greek plans to cut government deficit and praises Irish measures taken, while the 6% deficit ratio expected for eurozone as a whole in 2010 is seen as 'acceptable'.
EZA Conclusion: The Governing Council's view of the outlook for growth and price stability has not changed in the light of the latest data. We therefore maintain our long-standing view that the ECB will not start raising rates before mid-2010 and will want to see how market interest rates respond to the progressive withdrawal of its special support measures from April onwards. In particular, it will want to monitor very closely market reactions to the unwinding of the EUR 442 bn 12-month LTRO that matures on 1 July, along with the special smoothing operations that will be required at that time, before it reverts gradually 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.
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