ECB Preview: Expect to see Adjustment in Tender Terms and Upgrades in Economic Outlook

There will be several important announcements at the ECB's meeting Thursday. While the main refinancing rate will be kept at 1%, the central bank will announce adjustments in the refinancing operations. The ECB staff will also publish economic forecasts which should have been upgraded.

The ECB has announced three 12-month refinancing operations (in June, September and December 2009) so far and it's likely that President Trichet will state at the meeting that the December tender will be last one. The confirmation is crucial as it signals the central bank is gradually exiting from its stimulus measure (though policymakers must emphasize it does not imply tightening). In fact, demand for such loans has declined as economy recovers albeit slowly. Banks drew 75 billion euro in September's 12-month tender, compared with 442 billion euro in the first tender in June.

Another issue is the conditions of this 12-month tender - whether a spread will be added to it. For those in June and September, they were priced at 1% refinancing rate. We anticipate no spread will be added this time, too. However, President Trichet said at the last press conference that the spread and 'indexed rate' would be determined in December. More details about indexation should be given at the upcoming meeting.

Other non-standard measures such as 3- and 6-month operations, as well as covered bond purchases, will also be done at reduced frequencies.

At the previous report, the ECB staff projected GDP to grow +0.2% on average next year. However, strong 3Q09 GDP growth (+0.4% qoq) should trigger upward revisions.  Moreover, the staff will, for the first time, publish forecasts for 2010. Modest upgrades will also be seen on inflation due to increase in the VAT in Spain and rise in general administrative prices.

We do not think we will get any hints regarding the timing of the first rate hike as the central bank will likely reiterate that current interest rates are "appropriate", indicating no imminence for increasing rates in the near future.