ECB Hikes Rates By 25 bps As Expected - Follow The Press Conference Live

Tyler Durden's picture

Update 2: EURUSD now rising gradually as JC Trichet language in conference more hawkish than expected, although he does say the ECB did not decide hike was first in series.

  • Trichet says rates across entire maturity spectrum remains low
  • Says ECB did not decide hike was first in series
  • Interest rate decision was unanimous
  • Increasing CPI rates largely reflect commodity prices
  • Upside risks to inflation outlook
  • Medium term inflation outlook are on the upside
  • Liquidity provision to be adjusted when appropriate
  • Latest data confirms banks have continued to expand lending to private sector
  • Positive lending flow becoming more broad based
  • Inflation monitoring very closely
  • Risks to economic outlook are broadly balanced
  • Downside risks to growth from renewed tensions in financial markets, oil prices, protectionism, global imbalances
  • Paramount that rise in HICP inflation does not lead to second round effects

Update: ECB Hikes by 25 bps as expected - No market reaction whatsoever: all telegraphed.

EURUSD post announcement: smallest swing following an ECB decision that we can recall:

2 Year Bunds:


Today at 7:45am EDT the ECB's Governing Council, which convened at 3 am, will announce its interest rate decision, which is expected by 76 out of 80 polled economists to be a 0.25% hike to the current rate of 1.00%. This will be the first rate rise since July 2008. Ironically, the decision to curb inflation will come hours after Portugal demanded a bailout: a development which will only be intensified by an interest rate hike. Zero Hedge will follow and announce the decision in real time, while the press conference following the decision which will provide clues about Trichet's future rate strategy can be seen here.

And some more on today's decision from Reuters:

The lights on 36th floor of the ECB's building, where the Council's meetings take place, were still burning brightly at midnight Frankfurt time following Portugal's call for aid.

The ECB is concerned that firm oil prices -- near 2-1/2 year highs -- could boost inflation expectations and financial markets are pricing in two further quarter-point rises in interest rates this year to follow a move on Thursday.

But the Frankfurt-based bank must be careful not to hurt the euro zone's struggling economies by jacking up rates fast and Trichet, who shocked markets last month by signaling an April hike, may not want to heighten expectations for further rises.

Bank-to-bank lending rates have already risen on rate hike expectations. The three-month Euribor rate has risen 25 basis points since the start of the year and hit its highest level since June 2009 on Wednesday.

The biggest paradox, as discussed yesterday, is that Europe is tightening at a time when more and more peripheral countries are in dire need of cheap capital.

"Typically, rate expectations move very quickly once the hiking cycle starts and I think Trichet knows the recovery is still quite fragile on the euro area aggregate -- the periphery is still struggling," said Nomura economist Jens Sondergaard.

"It's a tricky act for them. They don't want to signal that this is the start of a hiking cycle. On the other hand, I don't think they can be too complacent on inflation at the moment."

"The euro has rallied considerably on the ECB rate hike view but it may be the case of buy the rumor sell on the fact," said Koji Fukaya, chief FX strategist at Credit Suisse.

Indeed, the peak in the EURUSD may have been seen for this rate hike cycle.

Here's what to wach for during the conference:

Last month, Trichet dusted off the phrase "strong vigilance", which in the past signaled a rate rise was only a month away.

If, at Thursday's news conference, he omits a reference to rates being "appropriate" and says the ECB is monitoring inflation "very closely", markets will expect another rise in the coming months. But economists expect him to be coy.

The ECB may soften the impact of its key refi rate hike by leaving a subsidiary rate unchanged -- a move that will be closely watched to gauge just how nervous the bank is about inflation and how much pain it thinks the periphery can bear.

The ECB's overnight deposit rate, which acts as a floor for short-term market rates, could be exempted from the hike and left at 0.25 percent. This would make the refi rate rise largely symbolic; actual money market rates which guide the cost of bank borrowing might barely move.

An important issue that Trichet may have to dodge is when the ECB will phase out its offers of unlimited loans. These were introduced as an emergency step but have now become a liability, injecting so much money into banks that the ECB cannot effectively control market rates.

All will be revealed in T-minus 40 mintes.

For those interested, here is Goldman's prediction for today's events:

1. Interest rates: 25bp hike

Trichet signalled a 25bp hike at the first ECB Governing Council meeting in March and has since confirmed the Bank’s intentions at his mid-month Testimony before the European Parliament. March headline (HICP) inflation came in above expectations at 2.6%yoy (no details on components yet, but the largest rise came in Italy) and this is likely to strengthen the hawks’ case.

As Kevin Daly and I argued in last week's European Weekly Analyst, the risks to headline inflation are likely to influence the Governing Council, given the potential upward bias relative to the ECB staff’s more sanguine published forecasts. They could, therefore, lend less weight to the extent of excess capacity prevailing in a euro area where unemployment is still only marginally below 10%.

2. Wording adjustment to Trichet’s statement

If a rate hike does materialize, we would expect Trichet’s introductory statement to be ‘neutral’, though not dovish. We expect him to use the words “accommodative” (without “very”) and “vigilance” (without “strong”). In the first paragraph, the “upside risks to price developments” could stay too, but as an ex-post justification for the hike. Turning to monetary analysis, a slight change to the tone of the wording related to money growth would not concern us too much given that it has been benign so far. By contrast, if Trichet refers to “strong vigilance”, this would contradict his March signal that the April hike would not immediately be followed by a rapid hiking cycle).

3. The interest rate corridor: Possibly from +/-75bp back to +/-100bp

Beyond the decision on the level of the ECB’s main policy rate, currently at 1%, the Bank also has to choose the level of the two rates that de facto provide a cap and a floor to short-term money market interest rates. These rates currently stand respectively +/-75bp away from the main refi rate. The ECB is likely to decide to re-widen this corridor to +/-100bp, the width prevailing before the crisis.

This decision, albeit technical, would have important implications for EONIA. In the event of a re-widening, EONIA volatility would likely increase, but beyond the possibly strong initial upward impact of the hike, EONIA may not settle around an average that reflects the full hike over time. Two opposing forces will be at work:

  • First, the "fixed rate full allotment" (FRFA) mode for all liquidity operations will remain in force until the summer, so market rates are still responding to the excess liquidity in the system: the tighter the corridor, the closer overnight rates are to the central refi rate (and vice versa) for a given quantity of excess liquidity.
  • But, second, the punitive spread between the cost of liquidity at the refinancing operations and the remuneration at the deposit facility will be wider, thereby reducing the appetite for excess liquidity, at least at the margin.

4. Trichet will likely tone down the collateral stretch on Irish debt instruments

Following the publication of the Irish stress-test results last Thursday, the ECB announced the suspension of credit quality requirements normally applied to its liquidity operations for any debt instrument issued or guaranteed by the Irish sovereign.

In this way, the ECB ensured continuity, for all counterparts, in accessing normal central bank funding, rather than create ad hoc medium-term lending facilities that would be at odds with the ECB's general desire to normalise liquidity policy. Yet, the ECB may have to compromise down the line, because it is still not clear how “persistent” banks (those dependent on ECB liquidity), which will see the maturity of their funding mechanically shortened once the FRFA is phased out, will cope with it.

5. Market-wide liquidity: Normalisation in sight, but why not wait another month or two?

In terms of the loose FRFA liquidity procedure, and/or "new liquidity facilities" in the Irish context, we believe that the ECB remains committed to the normalisation of its liquidity supply and therefore that:

  • The end of FRFA is in sight. Yet, we would be surprised to see it rushed through at this week's meeting. Many aspects of the sovereign crisis are still unresolved despite the European "March Summits" (see our European Views of March 12). Portugal faces potentially challenging funding deadlines this month and next, so it would seem hazardous to see the ECB move on too many fronts simultaneously.
  • As for a new, medium-term, targeted facility that would provide bridge funding for (Irish) banks, it sounds generally at odds with the ECB's exit mode. If discussed at all, such a facility would likely face fierce opposition within the Governing Council, and it will take a lot of diplomacy and suasion for it to materialise. In this light, we believe that introducing some sort of case-by-case negative discrimination on specific assets and/or counterparties would be more in line with the ECB’s overall philosophy.


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EscapeKey's picture

Jobless reports, consumer spending figures, public debts, deficits, inflation figures... none of these seemingly have an impact on the markets, so why would interest rates?

Increasing interest rates => WAHEY booming economy => market rallies.

Stable interest rates => WAHEY cheap money => market rallies.

Drag Racer's picture

so why would interest rates?

How much of the market is fueled by debt? Have ya heard fuel prices are rising?

"The biggest paradox, as discussed yesterday, is that Europe is tightening at a time when more and more peripheral countries are in dire need of cheap capital."

Funny how the issue which got them into trouble becomes the achillies heal...

EscapeKey's picture

Well, I was being facetious. Rising interest rates obviously will become an issue down the road.

Harlequin001's picture

Either Trichet does it voluntarily or the markets do it for him.

After higher prices comes higher rates. He will have to lower but will be unable.

The markets will do it for him, and he knows it.


Popo's picture

The ECB  has to raise rates to save the Euro, because they're about to bail out Portugal.

ipud's picture

One must speak out against these vile and corrupt institutions.

squexx's picture

Nothing but a dog and pony show. Just like with ones with ChairSatan Bernank and the puppet Obama.

cossack55's picture

Roger that. Wake me when they raise 500 basis pts.

russki standart's picture

Window dressing. Europe is already so fucked by inflation, excess taxes and debt.

gordengeko's picture

The head vampire council.

malusDiaz's picture

That cracks me up, they kinda do look like it!

gordengeko's picture

For some reason the movie daybreakers popped in my head when I saw these assclowns.  Silver to the heart bitchez!

Sudden Debt's picture

England hasn't changed it's rates so neither will Europe.

Markets will keep going up following inflation.

The 3.5% prognoses will go to 6/7% and nobody will really care.

And in 2012, the same will happen but by then inflation will be such a big issue that a simple rate change won't do shit.

Growth will need to pick up to 8/9% before there can be a rate change, minus inflation that's a meager 2% growth but for a inflation economy who needs to keep up that's just plain massive.

Let's not forget that minus inflation, there hasn't been a single western country that has any positive growth numbers.



EscapeKey's picture

Let's not forget that minus inflation, there hasn't been a single western country that has any positive growth numbers.

I don't know if I agree with this. Growth has been higher than inflation, due to a massive increase in public sector spending. That it's completely unsustainable, and that it frankly just shows the shortcomings of the broken-windows-counting GDP calculations is a topic for another day...

r101958's picture

True. And we shouldn't forget that the public sector produces nothing.

tomster0126's picture

inflation, inflation, inflation.  none of these policies are really going to make a huge difference in the areas Europe really needs help.

youngman's picture

A guy on the news today....a business channel..... said that 90% of Spains mortgages are tied to the short term rate and are will tank them even faster if they raise the rates...

Sudden Debt's picture

You can't imagine how many people I know who have adjustable morgage rates and are already downpaying 50% of their combined (M/W) income.

Any rate hike will drown them and risk them to foreclose which could really start to destroy the housing markets who haven't been really afftected here in Europe.

And if the housing doesn't take the beating, retail will.

A or B, the money has to come from somewhere and it ain't going to come from extra visa cards.



scratch_and_sniff's picture

Get a load of the calming muzak...cue carnage.

Cash_is_Trash's picture

If you want to nail-down inflation, raise real interest rates.

Not the nominalzzz

Sudden Debt's picture

If you want to nail-down inflation, STOP PRINTING MONEY!!

Harlequin001's picture

how very well said my flailing ... furry....wide mouthed... thing...

well said.

EscapeKey's picture

Look, they already told you - they only print money to make up for all the purchasing power lost as the money loses its value. The tail is chasing the dog, don't you know?

Sudden Debt's picture

I like to chase tail, what's wrong with that?



fredquimby's picture

I have a plan so sneaky you could pin a tail on it and call it a weasel....

H/T Blackadder of course...

Ethics Gradient's picture

Nothing, unless you chase tail in the style depicted by your avatar. In which case you'll likely wind up arrested.

falak pema's picture

PIIGS in despair, but so is France as trade deficits explode. High Euro means less exports. Only Germany reassured as this boosts its monetary clout for doing M&A abroad, and hedges against carry-trade euro attack. As its economy is less Euro sensitive, 60% intra euro zone trade and the rest hi-value, hi-tech abroad. "So come on you US HF come and attack our last resort Euro money haven as USD dives and Yen trembles"... Is their current EU mantra...For PM, the strong Euro is haven competition. Will Benocide hide or take retaliatory interest hike in USA? ....QE-3 is looking like being put WS assets sky rocket to thinning ozone layer...

THE DORK OF CORK's picture

If high trade surpluses were the road to prosperity then Ireland would not have any problems - however the bits of paper that London , Paris and Frankfurt produce give them a extraordinary privilege to live beyond their means and benefit from their paper Empires.

World trade is deeply distorted by overvalued debt based currencies - such distorted financial creatures need to be put back into their cage.


External Trade Dec 2010 (Prov) jan 2011 (Prel)



falak pema's picture

pity the dumbass UK banks and their RE shenanigans have brought the country to these dire straights, with the complicity of Eu banks!

anonnn's picture

Ahh. That word  again. Privilege!

DavidC's picture

Yup, and as expected the Dow is starting to climb in pre market...



Harlequin001's picture

and gold's now plunged to $1459.80.

that's my retirement just blown apart...

SheepDog-One's picture

Gold 'plunge' to 1459.80, my God the horror!

Harlequin001's picture

Yep, I'm still looking for a tall building...

falak pema's picture

how about know the Dubai sail that guy climbed the other day...good place for a swan dive!

Harlequin001's picture

Yes but by the time I get to the top it will have gone back up again, I'll be loaded AGAIN and there'll be no point.

Look $1464.5 already, and I haven't even got out of the foyer.

maybe I'll just have to try the front step...

no more time I'm afraid...

John Wilmot's picture

Well, I'm surprised. I thought Portugal would trump this rate hike. Guess not. O well, the dollar weakens against the euro and the melt-up continues in U.S. markets. Horray! ...

tek77blu's picture

bob chapman interview on why a rate hike means higher gold and silver prices:

lsbumblebee's picture

Gold traders are "digesting" this until AP or Reuters can come up with another rumor.

Spigot's picture

Either its a "token" increase with no real meaning in the financial or economic realms


they feel confident that they have ignited enough inflation that they can chase inflation higher by increasing rates (as the US Fed did in the 1970's).

Anonymouse's picture

The ECB raising rates? You know what this means? It's all over! They wouldn't raise rates in a weak economy.

We made it through the recession!

Let the joyous news be spread!
The wicked old recession 'last is dead!

SheepDog-One's picture

Yes .25 rate increase, my God its HUGE!  <sarc off>

bob_dabolina's picture

Would you look at that

Update #3:

Disregard update#2

tmosley's picture

lol, raising rates to 0.25% when inflation is 4+%

"There, I fixed it!"

Cdad's picture

Update 2: EURUSD now rising gradually as JC Trichet language in conference more hawkish than expected.

Not seeing this on my chart.  Declining now from 1.4270. 

AboutAverage's picture

I just keep wondering when these commodity ETFs are gonna fall apart.

Cdad's picture

Today or tomorrow...I suspect.  I think everything is about to get hit...less oil.