The upcoming ECB (European Central Bank) meeting is the focus of the week as president Trichet has mentioned several times that more detailed money market measures will be announced at the March meeting. Given the negative impact of Greece's sovereign crisis and sluggish economic data released since the previous meeting, we believe the measures will not be drastic and the policy rate will stay unchanged at 1%. ECB staff will also publish a new set of economic forecasts. Again, we expect only modest changes from previous projections.
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In December, the ECB made several announcements regarding refinancing operations. The main refinancing operations (MROs) with full allotment will last as long as needed and at least until the third maintenance period of 2010 ends on April 13. The rate in the last 12-month, longer-term refinancing operation (LTRO) was fixed at the average minimum bid rate of the MROs over the life of this operation. At the same time, the last six-month LTRO will be carried out on March 31, 2010 using a full allotment fixed rate tender procedure, while the same approach was also used in the regular, monthly three-month LTRO.
Several changes will be announced in the press conference on Thursday as the governing council seeks to smooth out the liquidity effects of the 12-month LTRO maturing during 2H10.
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We expect the ECB will announce that the three-month and the last six-month tender will be offered at a tracker rate, same as the case of the 12-month tender offered in December. At the same time, the central bank will continue to produce unlimited funding, but via MRO with shorter maturity (ex. one month or one week), at least until July 1 when the first 12-month LTRO with a volume of EUR 442 billion expires. Moreover, so as to normalize the money market operation, the ECB will likely re-introduce the auction for LTRO. This, together with reducing maturity of the funding operations, should increase the money market rate. The theme of the measures will be that the ECB would like to ensure sufficient liquidity is in the system, while excessive money will be drained gradually.
The ECB's economic projection should not have changed materially, although there may be modest upward revisions. In December, staff projected annual real GDP growth of between -4.1% and -3.9% in 2009, between +0.1% and +1.5% in 2010, and between +0.2% and +2.2% in 2011. Recent economic indicators suggested that growth in the euro zone is losing steam. Together with uncertainty about the Greek deficit issue and potential contagion in peripheral European economies, the ECB will remain cautious. The inflation outlook remains benign. In December, staff projections foresaw annual HICP inflation of 0.3% in 2009, between 0.9% and 1.7% in 2010, and between 0.8% and 2.0% in 2011. We expect little change on these estimates.
By the Staff at ActionForex.com
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