Previewing Today's ECB (And Trichet's Last) 7:45 EDT Rate Decision

Fom RanSquawk

Curtain call…

•    Outside chance of a rate cut
•    ECB may announce 1-year LTRO operation to support the banking system
•    ECB is expected to commit to further bond buying via the SMP

There are plenty of measures that the ECB can resort to today in order to please market participants who are eager to see a dramatic U-turn by Trichet amid the recent deterioration in the economic outlook, as well as what some have described as Europe’s version of the “Lehman” moment. However doing so when inflation is above the mandated target risks undermining the central banks’ much treasured price stability mandate and in turn may do more harm than good to the overall stability in the Euro area. Nevertheless, some analysts and economists have noted that the recent surge in inflation was in part due to changes that the EuroStat made over the summer, as well as value added tax (VAT) increases in Italy. At the same time, because September's increase in German inflation was tied to volatile energy prices, some members of the policy council may argue that there is scope for a rate cut since recent inflationary pressures appear to be transitory.

Still, the absence of a rate cut may not be viewed as the be all and end all since Trichet may announce that the ECB will re-introduce the controversial 1-year long LTRO operations in order to support the EU banking system. The ECB may also feel compelled to recommence purchases of covered bonds, which last time totalled EUR 60bln. In addition to that, the ECB is yet to provide further information on the 3-month USD swap line which the central bank said it will offer to commercial banks which have faced funding pressures in recent months as US money markets have stopped lending to European banks. The ECB is also expected to pledge its commitment to its ongoing SMP program until the EFSF becomes operational. In terms of the economic outlook, Trichet will likely reiterate his previous statement that risks to the economic outlook are tilted to the downside. However he will again remind the struggling peripheral Eurozone nations to keep up with promised austerity and reforms and not be tempted to enact another by Keynesian “stimulus” measure.

Finally, it is worth remembering that this is the last time that the press conference will be headed by Jean-Claude Trichet, who is due to pass on the Presidency role to his fellow central banker Draghi.