giovedì 3 dicembre 2009

Some thoughts on today’s ECB’s press conference

The ECB held today its monthly monetary policy meeting and the President of the ECB, Jean Claude Trichet, held a press conference at the end of the meeting.

The most important pieces of news arrived from today’s meeting were:
1) The December 12-month longer-term refinancing operation will be the last one and the rate will be fixed at the average minimum bid rate of the MROs over the life of this operation.
2) This decision on the 12-month longer-term refinancing operation does not imply anything as regards the perspective of Refi rate, held unchanged at 1% today.
3) The 2010 mid-point GDP projection was revised upward to 0,8% from 0,2% in September. 2011’s GDP was forecasted at 1,2%. Inflation estimate for 2010 was revised upward from 1,2% to 1,3%.
4) Trichet confirmed that he believe a strong US Dollar is in the interest of the USA, indicating in a polite way that the ECB is not happy with regard to the EUR/USD exchange rate trend.

Following today’s Trichet press conference we do not see any reason to change our estimate that the Refi rate would stay unchanged at least to the end of H1 2010. Even if the new ECB projections on economic growth and inflation are in line with a rising Refi rate to 2% by the end of 2010, we do not expect the ECB tightening monetary policy unless the Fed implements an exit strategy from its expansionary monetary policy before.
Indeed, an early ECB tightening monetary policy may further strengthen the Euro upward trend versus the USD. In a study published in ("Can we understand the recent moves of the euro-dollar exchange rate"), the economists Brender, Gagna and Pisani have offered evidence that the Euro/Dollar exchange rate moved broadly in line with the Fed’s and ECB’s monetary policy estimates until Lehman Brothers went bust.
With a EUR/USD already 25% above fair value according to OECD’s Purchasing Power estimate is very difficult to envisage that the ECB may take a similar decision. Moreover, due to Euro upward trend in the last few months, the Euro zone Monetary condition Index is well above the long term historical average, with a dampening effect on Euro zone economic recovery.

Looking ahead, the ECB is very unlikely to do anything that could further strengthen the Euro.

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