10 November 2009

EZA 922 Report: ECB 5 November Council Post-Meeting Assessment

·        As foreseen, ECB's key rates unchanged at 5 November meeting, with the 'refi' rate at 1% for the seventh month in a row and its deposit and lending rates held at 0.25% and 1.75%.

·        ECB increasingly confident now that the eurozone economy has turned the corner, with positive real GDP growth emerging in H2 but still likely to be fitful before a steadier upward trend emerges around mid-2010.

·        Inflation still expected to turn positive in coming months but no early resumption of inflationary pressures and inflation expectations still seen as firmly anchored.

·        Fall in annual M3 and credit growth may be coming to an end, with monthly loan flows to households now slightly positive but net flows to non-financial corporations negative and likely to reflect lack of demand rather than supply constraints for some months yet.

·        ECB's policy measures again seen as providing strong ongoing support, with their full effects still to feed, through but a clear hint that December's 12-month LTRO will be the last and that decisions on an exit strategy likely to be decided at 3 December meeting.

EZA Conclusion: This latest assessment reinforces our long-held view that the three key official interest rates are set to stay on hold through to mid-2010, when the ECB's enhanced credit support measures will start to be unwound, allowing them to run off gradually at maturity. This would probably start with the June 2009 12-month LTRO, although some partially offsetting increase in liquidity provision at shorter maturity might then be needed. Interest rates can be expected to be raised cautiously from then on, or possibly one or two steps behind.

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

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