ECB: A Non-Standard Event

Overview: ECB disappointed the markets today by only cutting the refi rate 25bp to 1.25%. However at the press conference ECB president Trichet kept the door open for a further reduction in the refi rate. We still expect ECB to reach 1.0% and that this will be the bottom in the rate cycle. The next cut of 25bp should come in May or June. The deposit rate was cut to 0.25% as expected and hence the rate corridor was kept unchanged. Trichet clearly signalled that this will be the bottom for the deposit rate. ECB did not announce any non-standard measures, but "announced" that they will give an announcement on this subject on the next meeting. Bond yields rose on the ECB decision and it increases our conviction that bond yields are in a bottoming phase and will be heading higher over the next 3-6 months as economic indicators improve gradually. The move gave support to EUR/USD and will likely continue to do so in the short term. In the medium term we still look for the USD to gain on the back of a stronger US recovery relative to Euroland.

Rate decision: The decision to only cut by 25bp is a signal that ECB believe they are close to the rate bottom, but it does not rule out further cuts. In the Q&A session Trichet said that 1.25% was not the low limit but that any further cuts would be done in a measured way. On the deposit rate, however, Trichet was very clear and said ECB did not expect to cut the deposit rate further after reaching the current level of 0.25%. On the question of whether the decision was unanimous, Trichet replied that it was taken by consensus. Trichet normally confirms if decisions are unanimous and hence it clearly points to disagreement within the council with some members preferring a 50bp cut.

Non-standard measures: ECB disappointed a bit by not announcing any new non-standard measures. We had expected an introduction of a 12 month auction (the longest is currently 6 months). But ECB instead chose to wait yet another month before giving an announcement on this issue. If they just wanted to lengthen the maturity on the auction they could do it quite easily and hence would not need more time. So this creates some expectation that something "bigger" (which requires more planning) will come, i.e. some kind of asset purchase programme of commercial paper or short term credit bonds.

ECB macro outlook: There were no major changes to the economic outlook. ECB expects the economy to remain very weak for the rest of 2009 and sees a gradual recovery in 2010. Risks to this scenario are still seen as balanced and thus suggest that ECB has not changed their main projection from March - at least not materially. On inflation ECB noted that there were increasing signs that broad based inflation (core CPI) was slowing down. Headline inflation is still expected to reach negative territory but ECB highlights that this is only temporary and due to base effects from energy prices. Inflation expectations are still anchored close to 2%.

Danske Bank
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