ECB Meeting: Non-eventful As Expected

As anticipated, ECB kept its main refinancing rate unchanged at 1% in August. Moreover, there's nothing new in the press conference that we could get regarding economic outlook, monetary policies or exit strategies.

Since October 2008, ECB has reduced interest rate by 325 bps which the central bank believed is 'appropriate' as confirmed by recent economic data. While the President Trichet did not state whether the current rate is the floor, we believe it will not be changed any time soon.

Concerning non-standard measures, ECB allocated 442B euro in 12-month open market operation in June and it will hold 2 more 12-month tenders later this year. Moreover, it started buying 60B euro of covered bonds.

Despite improvement in economic outlook in both the 16-nation Eurozone as well as global markets, ECB will not raise interest rate until late 2010 or even 2011. However, exit strategies from ample liquidity provision will be done throughout 2010. EONIA has been trading around 0.34-0.35% since late June, the first thing the ECB would do is to scale back the liquidity so as to push EONIA to a higher level.

Concerning economic outlook, the Governing Council remained cautious and anticipated economic will still be in contraction in 2H09. ECB forecast GDP will contract -4.6% in 2009 and -0.3% in 2010. Inflation will average at +0.3% and +1% in 2009 and 2010, respectively.