The Annotated Trichet

Goldman's Natacha Valla has compiled this useful paraphrase of the Trichet press conference conference. In a surprising turn of events, the ECB head pulled a Greenspan and left many scratching their heads just what he means. We will take a quick stab at predicting the implications of today's rate hike: once the EFSF runs out of capital, or outright fails, the ECB will be back in loosening mode right fast.

From Goldman Sachs

ECB 9/9: End of press conference
The ECB’s April press conference has ended. Even though “strong vigilance” was replaced by “monitoring very closely” in the introductory statement, the Q&A session retained a pretty hawkish tone with strong preemptive warnings about second round effects.

ECB 8: More on second-round effects / "something coming-up" in the bank/collateral/liquidity space
On second-round effects (again): Trichet confirmed high (preemptive) concern on second round-effects when asked about German wage developments.

On liquidity/collateral, something is brewing: Underlying the correlation between the credit worthiness of banks and that of sovereigns, Trichet hinted that they are working on changes in this space and that “a decision” might come soon.

ECB 7: "Extremely alert" on second round effects (14:24)

On inflation expectations: Trichet considers that they have not been unanchored so far. This is interesting, knowing that the 5y-5y swap (that they monitor) has been trending up for a while.

On second round effects: “we are extremely alert” about all price (and wage) setters is the wording. That is very important and gives some clarity on which data will weight more than others in the coming months. We should watch wage and cost developments very carefully to gauge the timing of upcoming hikes.

To me, the statement on second round effects should be given more weight that the one on inflation expectations.

On Germany: Trichet dismisses the idea that the ECB focuses on Germany more than any other country – although arguably, by construction, Germany being the biggest Euro-area country, it has the biggest weight in euro-area real GDP figures…

ECB 6: no comment on SMP bond purchases / anchored expectations good for confidence (14:12)

On the SMP: Trichet doesn’t want to comment on it. We know that for the ECB, buying government bonds is not the natural place to be, and they will keep intervening only very reluctantly – “upcoming hibernation” seems to be the right word…

On inflation expectations: Trichet says that anchored inflation expectations are good for confidence and therefore growth. This draws a picture in which if expectations are anchored, then confidence will be strong, then the recovery on track. The logical conclusion would be that barring any “accident” in the banking/sovereign space, that the hiking cycle should gradually unfold this year.

ECB 5: "Addicted banks" / series of hikes vs upside risks?  (14:05)

On “dependent” banks (that do need ECB liquidity to survive) / Irish collateral: no substantial news. Trichet says that thought is under way on the correlation sovereign/bank correlation (good thing!), and that last week’s Irish collateral decision was an important one (it definitely is).

On ”series of hikes”: confirms our interpretation. Trichet restates that no series of hikes is being signaled today, *but* back to old times.

ECB 4: Next hike "data dependent" / fiscal policy in focus (13:59)

Clarification: I meant next hike will be “data dependent".

Trichet is very carefully restating that fiscal discipline, proactive consolidation, etc, will be key. This sounds a warning that the ECB will certainly not let fiscal looseness unpunished, and any drag in fiscal adjustment would, if any case, induce them to remain on the hard-line. Whether or not this is time-consistent is not clear, but the intention is there.

ECB 3: Unanimous decision - means will look through data flow for next hike (13:52)

End of the written statement. As expected, Trichet waved his finger to governments: EMU reforms don’t go far enough. They are disappointed to remain the only ones in a position to act in sovereign markets.

Unanimous decision, but not the first of a series of rate increases: that confirms the interpretation that the intention is not to signal a hike in May, perhaps even not in June, but that they will look through the data now to determine the timing of the next hike. Pretty much “back to old style” rate setting with a “standard” hiking cycle ahead of us.

ECB 2: Tough tone, domestic demand pressures, monetary analysis back in the picture (13:45)

The statement is on the hawkish side – two key elements:

  • upside risks to price stability remain prominent, with, on top of energy prices and “exogenous” factors, a mention of “stronger than expected domestic demand pressures”. This is an important mention and shows that the ECB interprets core inflation as “turning” and not “plateauing”

  • monetary analysis creeps back into the picture, underlying the acceleration (but still modest) of M3

To me that reads as a signal that even without a move next month, the hiking cycle has started.

ECB 1: Accommodative (dropping 'very'), monitoring 'very closely' (13:38)

The ECB’s press conference has started. As expected, Trichet did not turn dovish and slightly neutralised the introductory paragraph, qualifying the stance to remain accommodative (dropping “very”), monitoring “very closely” (no “vigilance”).

So no commitment to a move in May.

ECB: 0.25bp hike but no corridor widening (12:54)

The ECB raised its interest rates by 0.25bp to 1.25% as expected, but did not re-widen its interest rate corridor, leaving it at +/-75bps at its April meeting this morning (new deposit and lending rates at 0.5% and 2.0% respectively).

Keeping the corridor unchanged comes a bit as a surprise, but relative to a widening, this should: keep EONIA volatility broadly stable, and avoid a differential effect between banks that refinance in the markets and those at the ECB (core versus periphery).


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