Previewing The ECB's 12:45PM BST (7:45 EDT) Interest-Rate Decision

•    The ECB is expected to keep its benchmark interest rate unchanged at 1.50% as expected
•    Analysts will look to see any comments by Trichet on the use of the Securities Markets Programme (SMP)
•    Trichet may be asked on the possibility of further extensions to ECB’s 3-month LTRO

Following a rate-hike in July, the ECB is expected to keep its key benchmark interest rate unchanged at 1.50%, as the central bank takes its decision based on the economic situation prevailing in Eurozone as a whole as opposed to individual countries. In his last press-conference, Trichet said that the ECB is monitoring inflation risks very closely and given a decline in the latest Eurozone CPI estimate for the month of July, the chairman will likely refrain from further monetary tightening for the time being. Other economic indicators, including ZEW survey, manufacturing/services PMI, and Business Climate Indicator for the Eurozone since the last rate-announcement have all pointed towards a slowdown in economic activity. Also, adverse external factors such as growing signs of a global economic slowdown and the debt situation in the US are likely to persuade policymakers to adopt a “wait and see” approach.
As usual the focus will shift to Trichet’s press-conference following the rate decision, where analysts will query the chief on a number of issues. Contagion fears in the Eurozone are likely to dominate the press-conference with recent focus on larger Euro-area constituents such as Italy and Spain. Despite recent widening in the Eurozone peripheral 10-year government bond yield spreads, the ECB has so far avoided utilising its Securities Markets Programme (SMP). It is also worth noting that the EU leaders have recently proposed the EFSF to become more flexible, whereby the fund can be used to purchase Eurozone peripheral bonds if consented by the ECB. Trichet may be asked if the SMP will still be utilised or the reliance would be more on the EFSF for bond purchases. Till a month ago the ECB was vehemently opposed to a “selective default” of any Eurozone member, however it seems to have taken a U-turn since the agreement on a second bailout package for Greece, whereby it may still purchase bonds from countries in “selective default” when backed by appropriate collateral from the European Union. If the ECB signals a reactivation of the SMP, this may see bids in the EUR and equities, whereas bund futures are likely to come under pressure.
Trichet may reiterate that the ECB will monitor inflation risks very closely, and that the policy remains accommodative, if Trichet mentions the ECB is in strong vigilance mode this would potentially signal a rate hike in September and may provide an uptick to the EUR. Trichet will most probably continue with the separation-principle of maintaining price stability and at the same time to provide ample liquidity. ECB’s 3-month LTRO as fixed rate tender with full allotment is coming to an end on 28th September, 2011, and Trichet may be asked if this facility will be extended. However, it is unlikely he will provide any clear answer today and will likely leave it till next month. Overall, the ECB is expected to take a balanced view on the issue of policy-tightening, which may see a limited reaction across asset-classes. However, if the President opts for an extension of the 3-month LTRO, or in an unlikely event of reintroducing its 6-month LTRO, we may observe an uptick in Euribor and Bunds futures, whereas the EUR will likely come under selling pressure. Alternatively if he negates an extension to the LTRO, this may be perceived as a tightening measure and thus provide support to the EUR.

courtesy of RanSquawk


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