The European Central Bank kept interest rates at 1.0 percent on Thursday, moving attention to President Jean-Claude Trichet's view of the fledging euro zone recovery and new ECB economic projections.
All 80 economists polled by Reuters had forecast the decision to keep rates at their current all-time low for the fourth month running and markets were little moved by the decision. [ECB/INT]
"It's absolutely no shock that both the refinancing rate and the deposit rates have been left on hold. Indeed previous talk about a possible reduction in the refi rate has all but disappeared given the signs of recovery through much of the euro area," said Investec economist Phillip Shaw.
The 16-country euro zone appears to be enjoying a speedier-than-expected recovery. Germany and France, the region's biggest economies, unexpectedly bounced out of recession in the second quarter, while manufacturing and service sectors are picking up. [ID:nL3446290]
Euro zone GDP shrank only 0.1 percent in the second quarter against the previous three months, following a 2.5 percent drop in January-March, and may return to growth in Q3.
Nevertheless, economists say Trichet is likely to preach caution over growing talk of a full-blown recovery at his 1230 GMT news conference.
"Numbers have been coming in better, but policymakers have made it clear that there is still some time before they can sound an all-clear," said Dirk Schumacher, Senior European Economist at Goldman Sachs. "They will keep their stance that there is no change needed to policy rates or other measures."
Sweden also kept interest rates on hold earlier on Thursday.
The need for caution was underscored as policymakers met. Euro zone retail sales fell unexpectedly in July, data revealed, a reminder that demand remains fickle at best. [ID:nL3426278]
Trichet is also due to read out a new set of ECB staff economic forecasts at the news conference. Following surprisingly solid improvements in data, they are likely to show higher GDP than the last projections in June. [ID:nL4997231]
"We look forward to seeing how much staff forecasts are revised up and to hear the tone of Trichet's comments that accompany the numbers," said Investec's Shaw.
"It will be also interesting to see what he says … about how the firmer economic data is translating into a more optimistic outlook for the euro zone over the next 18 months."
TENDER INTEREST
The ECB is also expected to report on the second month of its 60 billion euro covered bond purchase programme, part of its efforts to get liquidity circulating again.
Analysts will keenly watch for news on the ECB's second one-year liquidity operation, planned for the end of this month. Uncertainty remains about whether it will offer banks the money at 1 percent interest again — as markets and analysts currently expect — or bump up the price.
Trichet may reveal the rate during the news conference to give markets time to position themselves. If the ECB did charge above 1 percent, markets would see this as a signal that Trichet and his colleagues expect rates to be higher in a year's time.
"The question is whether they add a spread or not," said Goldman's Schumacher. "Probably not in our view, but that is the main area of interest because it is likely to be where they start when they change their tone."
TOO EARLY TO EXIT
Now that economies appear to be over the worst of the crisis, attention is turning to how central banks and governments will take back the billions of euros of stimulus and support they have pumped into the financial system.
"We are very interested to hear any talk about exit strategies. It seems to be one of the key topics behind the G20 finance ministers meeting tomorrow," said Investec's Shaw.
Trichet will attend the meeting of the Group of 20 leading industrial and emerging nations. Euro zone finance ministers appear to be in tune with the ECB. "Time has not yet come to withdraw from the fiscal stimulus," their chairman Jean-Claude Juncker said on Wednesday. [ID:nL2439636]
"We have to continue this effort in the course of this year and next year, then we have to agree on an exit strategy. We will discuss this."
The worry is that the recovery's momentum will be lost once central banks and governments around the world begin to take away the emergency support measures built up during the crisis.
Economists have also raised doubts about the speed and sustainability of any recovery because of high and rising unemployment, which reached 9.5 percent in July — the highest in more than 10 years.
Trichet is expected to give little away on the ECB's exit plans just yet.
On rates analysts expect him to repeat last month's view that the main refi rate is "appropriate", although any deviations in language will be jumped on.
"The (Governing) Council appears sceptical about the sustainability of the recovery. We expect the Council to let the recovery prove itself before calling the extraordinarily accommodative policy stance into question," Deutsche Bank analysts wrote in a note.
Economists polled by Reuters expect unchanged rates until the third quarter of next year and investors have eased back on their bets for early tightening.
