ECB holds rates, to caution on economy
The European Central Bank kept its interest rates at a record-low 1.0 percent on Thursday and its head Jean-Claude Trichet is expected to caution against hopes of a speedy economic recovery.
The decision met analyst expectations — all 82 economists in a Reuters poll had expected interest rates to stay on hold in October for the fifth month running, with most expecting them to stay unchanged until late next year.
“This was no surprise at all,” said Nomura economist Laurent Bilke. “The ECB has signaled there wouldn’t be any additional monetary policy stimulus but that they are not ready for a rate hike yet.”
Financial markets were largely unchanged after the decision.
The Governing Council’s Venice meeting was the second of two held annually outside its Frankfurt base and marks the first anniversary of coordinated rate cuts by major central banks in the aftermath of the Lehman Brothers collapse.
The Reserve Bank of Australia on Tuesday became the first Group of 20 central bank to raise rates after the recession hit.
While most analysts expect the next ECB rate move to be a hike, they forecast that it will not happen before the third quarter of next year. But tighter liquidity conditions may push up market rates before that, futures pricing shows.
The Bank of England also kept its rates on hold on Thursday, as was widely expected quick pay day loan.
Attention now turns to Trichet’s news conference, where he is seen confirming that current policy settings are appropriate. Markets will listen for any clues on the timing and order of the ECB’s exit strategy.
“Current rates are appropriate, that is a key sentence that will probably stay until well into next year,” Bank of America economist Holger Schmieding said.
The ECB is unlikely to detail its exit strategy, just to repeat that it can exit when needed, he added.
Trichet’s comments on how governments should wind back their extra spending and how the ECB will take fiscal exit into account in its monetary policy decisions will also be key.
“They will definitely not do any explicit coordination (between fiscal and monetary exit strategies),” Schmieding said, but added: “There might be actually be a case that if fiscal policy is tightened in 2011, the ECB may take that into account and thus have an indirect impact on its rate policy.”
DOLLAR WEAKNESS
Trichet’s comments on economic recovery will also face close scrutiny. The euro zone economy shrank by a revised 0.2 percent in the second quarter of the year, and analysts expect it to have grown 0.3 percent in the July-September quarter.