Smc 090507

HAN DE JONG +31 20 628 4201 7 MAY 2009

Special macro comment The ECB took four decisions today. Our assessment: positive ECB: refi rate

refi-rate (currently 1.0%) but future operations may be at a rate including a premium.

%

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Sub 4.: This was only a decision in principle. Details of the

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technicalities of these purchases will be decided on at the ECB 3

governing council meeting early June. Trichet said that the amount involved may be in the order of EUR 60 bn. When

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asked why buy covered bonds in particular, Trichet said that the ECB feels that this asset class has been disproportionally

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hit by turmoil and that the ECB wants to ensure that the 0

functioning of this market improves. Note that the key issuers

2004

2005

2006

2007

2008

2009

in this market are banks. Trichet refused to call this quantitative easing and called in credit easing. This suggests that the sole

Source: Bloomberg

aim is to make this market work better, not to provide 1. The refi rate was cut from 1.25% to 1.0%. The marginal

additional liquidity.

lending rate was cut from 2.25% to 1.75%, while the ECB’s economic outlook

deposit rate was left unchanged at 0.25%. 2. Within the framework of the ECB’s enhanced credit support

Mr Trichet’s assessment of the economic outlook was

its

balanced and solid, no surprises. He acknowledged upside

counterparties, refinancing operations with a maturity of 12

and downside risks to growth and inflation. He suggested that

months. So far, the longest maturity on offer was six

the worst in terms of economic contraction is probably behind

months

us. This is in line with our and the consensus view. On the

operations,

the

ECB

will

make

available

to

3. The European Investment Bank (EIB) will be recognised as

downside, he highlighted risks of renewed turmoil in financial

a regular counterparty of the ECB as of 8 July, giving the

markets and protectionism. But he also stressed that the

EIB access to the refinancing facilities of the ECB.

unprecedented nature, scope and timing of the policy response

4. The ECB will engage in the purchase of covered bonds issued in euro by eurozone residents.

is having positive effects. Trichet also said that headline inflation is likely to fall into negative territory on a year-on-year basis during the summer. But, he stressed, that is temporary,

Further details:

due to base effects, and is not relevant for the conduct of

Sub 1.: During today’s press conference, ECB President Jean-

monetary policy. He did, however, acknowledge that inflation

Claude Trichet said several times that the governing council

pressure is easing further across the board. Several times,

has not decided that rates cannot go lower. Obviously, he said

Trichet stressed that inflation expectations remain well

that current rates are appropriate for achieving the ECB’s goal

anchored, in line with the ECB’s definition of price stability.

of price stability in the medium term. On

monetary

developments,

Trichet

noted

that

the

Sub 2.:

deceleration seen in recent months in M3 and credit growth is

The 12-month refi operations will be at a fixed rate and there

consistent with the positive assessment of the inflation outlook

will be full allotment. The first operation will be open for tender

and confirms that a process of deleveraging is taking place.

on 23 June. This first 12-month operation will be at the main

That is interesting because deleveraging is inevitable and perhaps there is little point fighting against it.

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ECONOMICS DEPARTMENT

HAN DE JONG +31 20 628 4201 7 MAY 2009

Trichet also expressed the view that governments must be cautious as budget deficits are rising rapidly. In addition, he called on policymakers to continue strengthening the structure of their economies by continuing labour market reform aimed at making labour markets more flexible and product market reform, aimed at fostering competition. Assessment We are encouraged by the ECB’s decisions today. The provision of unlimited 12-month liquidity support, at least at first at the refi rate, should be a very significant boost to liquidity and confidence. In addition, by lowering rates and stating this is not necessarily the end to the easing cycle, the ECB has implicitly committed itself to a very easy stance on monetary policy for some time. This will be helpful in lowering borrowing costs across the eurozone and also be supportive of confidence. Third, the announcement concerning the purchase of covered bonds shows that the ECB is willing to go further than many people had thought likely. Last, recognising the EIB as a regular counterparty is also positive as it gives the EIB more flexibility. Overall then, today’s ECB decisions went a little further than expected and must be seen as supportive of confidence and of the economic prospects.

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ECONOMICS DEPARTMENT