ECB Preview: Trichet's Comments a Prelude for New Economic Projections in December

As there's only one month to go for the release of a new set of staff projection in December, we will probably not get much new information from the ECB at November's meeting. Policymakers should leave the main refinancing rate unchanged at 1%. In the accompanying statement, it will be reiterated that growth and inflation risks are ‘broadly balanced' and interest rates are ‘appropriate'.

ECB President Trichet's tone may turn more optimistic in the press conference given stronger-than-expected economic data in 3Q09. Eurozone's manufacturing PMI rose to 50.7 In September from 49.3a month ago, indicating the first expansion in 17 months. Consumer and business confidence also improved in the second half of the year. Germany's Ifo business climate index surged to 91.9 in October from 91.3 a month ago. That's the highest reading in 13 months. Although the new set of staff projections (with 2011 projection included for the first time) will be given in December, we look to see if the President would prepare the market for potential change at this meeting. In fact, the ECB will probably have big upward revisions on economic growth given strength in economic activities. The central bank's growth projection for 2010, which stands at +0.2%, seems to be too conservative.

Moreover, we expect questions about whether the ECB will charge a margin over the main refinancing rate (1%) at the 12-month tender scheduled for December 15. However, we do not anticipate the ECB will make any commitment regarding this in November.

Another issue is recent strength in the Euro. Since the beginning of 2009, euro has risen +6% against USD with most of the gains made in recent 3 months. Appreciation in the euro is one key risk to economic growth as it puts pressure on the region's exports.