09 March 2010

EZA 936 Report: ECB Observer

• As widely expected, the ECB kept its key rates unchanged at its 4 March meeting, leaving the 'refi' rate at 1% for the tenth month in a row.• Economic recovery seen as on track but likely to remain uneven, with ECB Staff projecting real GDP growth of 0.8% in 2010 and 1.5% in 2011.• 'Headline' inflation, 0.9% in February, is expected to stay around 1% in the near term and to remain moderate over the policy-relevant (medium-term) time horizon.• Underlying pace of monetary expansion still seen as moderate, despite only 0.1% annual rate of M3 growth in January and negative annual growth rate of private sector loans.• Detailed decisions taken to phase out special liquidity measures without a final deadline for their complete withdrawal, but this should not be seen as a signal that the ECB is about to tighten its policy stance.

·        As widely expected, the ECB kept its key rates unchanged at its 4 March meeting, leaving the 'refi' rate at 1% for the tenth month in a row.

·        Economic recovery seen as on track but likely to remain uneven, with ECB Staff projecting real GDP growth of 0.8% in 2010 and 1.5% in 2011.

·        'Headline' inflation, 0.9% in February, is expected to stay around 1% in the near term and to remain moderate over the policy-relevant (medium-term) time horizon.

·        Underlying pace of monetary expansion still seen as moderate, despite only 0.1% annual rate of M3 growth in January and negative annual growth rate of private sector loans.

·        Detailed decisions taken to phase out special liquidity measures without a final deadline for their complete withdrawal, but this should not be seen as a signal that the ECB is about to tighten its policy stance.

 

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 an Staff projections. In particular, domestic demand appears set to remain weak for some time to come. We therefore maintain our long-standing view that the ECB is not likely even to consider raising rates at least until the autumn, wanting first to see how market interest rates respond to the progressive withdrawal of its special support measures during the second half of the year. 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 arrangements that it has just announced. We thus do not expect to see an increase in official interest towards more neutral levels until the tail end of this year or even through to the spring of 2011.

 

Please see attached our regular Council Post-Meeting analysis from John Arrowsmith, simply read onscreen or 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

© EZA