Monetary-Policy Meeting at the ECB

Interest-rate announcement

Current interest rate: 4.00%

In favour of an interest-rate hike of 25 bp:

• sentiment indicators point to weaker growth
• weaker growth will lead to a more moderate inflationary pressure

In favour of unchanged interest rates:

• inflation is still significantly above the central bank's target of 2% (inflation at 3.6% y-o-y in March). See chart 1
• the rising oil price helps maintain the upward pressure on inflation

Market expectations: unchanged interest rates

Jyske Bank's expectations: unchanged interest rates

The European central bank will hold a monetary-policy meeting on Thursday 8 May with the announcement of the interest-rate decision at 1:45 p.m. and a press conference at 2:30 p.m.

There is consensus in the market that neither this time will the ECB follow the example of its American counterpart and cut interest rates.

Inflation has increased sharply over the past twelve months as commodity prices exploded, and given the continued skyrocketing oil price it appears unlikely that the ECB's Board of Governors will soften the sharp rhetoric which it has pursued so far.

The sentiment indicators are, however, slowing, and all other things being equal a weaker growth picture should contribute to inflation falling towards the central bank's target of 2% in 2009. Our macroeconomists therefore still believe that the ECB will cut interest rates twice by a total of 50 bp during the last six months of 2008. If the oil price falls, we may already see a softening of the ECB's rhetoric at the meetings in June and August. If the oil price continues the current path, there is, however, a risk that the ECB will postpone the expected interest-rate cuts or that it will hold interest rates at the current level for the rest of the year.

The market is very uncertain about the ECB's direction for the rest of the year. Only a week ago, there were almost no expectations of a cut in 2008, but after the release of a string of weak economic indicators from the euro zone, the market is currently discounting an interestrate cut of 15-20 bp for the year.

EUR has appeared a little soft against USD lately, but technically it appears as if EUR/USD has found support around 154.20. Given expectations of unchanged rhetoric from the ECB on Thursday, there are no indications of a decisive breach to the downside for EUR/USD at the moment.

Across the Atlantic, the Fed signalled recently that interest rates are held for the time being, and since there are 30 days until the next string of important economic indicators, a sharp USD weakening is not on the cards for the short term. We therefore maintain a neutral view of EUR/USD.

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank's customers and may not be copied.