09 April 2010

EZA 941 Report: ECB Observer

EZA941/11Apr2010: ECB 8 April Council Post-Meeting Assessment

·        As most observers expected, the ECB kept its key rates unchanged at its 8 April meeting, leaving the 'refi' rate at 1% for the eleventh month in a row.

·        Economic growth seen continuing to expand but likely to remain 'moderate' and 'uneven'.

·        'Headline' inflation, at 1.5% in March, higher than expected, perhaps due to adverse weather conditions, but expected remain moderate over the medium-term.

·        Underlying pace of monetary expansion still seen as moderate, despite M3's -0.4% annual growth rate in February and despite equally weak lending to the private sector.

·        Trichet defends Eurozone governments' decision on stand-by facility for Greece but emphasises importance of their collective responsibility for exerting peer pressure to ensure full implementation of Greek government's debt consolidation programme.

·        Governing Council announce continuation beyond December 2010 of current (exceptional) rating threshold for government debt instruments acceptable as collateral, but graduated valuation haircuts for private sector debt to be introduced as from 1 January 2011.

EZA Conclusion: Given the Governing Council's unchanged view of the subdued outlook for growth and price stability, and surrounding uncertainties, the ECB is not likely to consider even a first step towards the 'normalisation' of official interest rates before the tail end of 2010 or early 2011, waiting first to see how market rates respond to the phased withdrawal of its special support measures during the course of this year. ECB's strong support for the Greek stand-by and extension of the rating concession on government debt qualifying as collateral ought to - but may not - help allay market fears about the sustainability of the present monetary union of 16.

Please see the attached 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

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