06 July 2009

EZA 904 Report: ECB Observer

ECB 2 July Council Post-Meeting Assessment

· As foreseen, interest rates kept on hold again at 2 July meeting, leaving the ECB's 'refi' rate and deposit and marginal lending rates at 1.0%, 0.25% and 1.75% respectively.

· As in its analysis a month ago, ECB expects activity to fall less rapidly in the remainder of 2009 but recovering gradually by mid-2010, with inflation rate expected to turn positive again towards the end of 2009 but to remain dampened thereafter.

· Trichet plays down "moderate monthly contraction" of loans to corporations, stressing "slightly positive" flow of longer-term loans.

· First 12-month longer-term refinancing operation judged an "enormous success", while ECB's risks in forthcoming covered bond purchase programme have double guarantee of counterparties' signature and underlying assets.

· Governing Council committed to ensure all enhanced credit support measures could be quickly unwound and liquidity absorbed once macro-economic environment improves.

EZA Conclusion: ECB's latest assessment reinforces our view that interest rates now likely to stay on hold throughout the summer and perhaps even up to the year-end and beyond as the ECB gauges how effectively its successive 'unconventional' credit support measures and past rate cuts work their way through the monetary policy transmission mechanism, with an increased likelihood that the next move will be up rather than down.
 

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