Simple's Green Room

[strongtower]

ECB - First Steps to an Exit

At today’ s post announcement press conference ECB President Jean Claude Trichet announced a series of measures designed to move European monetary policy away from the ultra accommodative posture that has been in place since the start of the global credit crisis which began in September of last year. Mr. Trichet announced that “that the rate in the last 12-month longer-term refinancing operation, to be allotted on 16 December 2009, will be fixed at the average minimum bid rate of the MROs over the life of this operation.”
This change in policy to a variable model from the current purely fixed 1% lending rate along with the announcement that the ECB will no longer offer a 6 month tender after March of 2010 indicates that the central bank is beginning to tighten the loose monetary conditions extant in the region.
Mr. Trichet also went on to upgrade the economic assessment for 2010 with the ECB now seeing growth at 0.1% -1.9% versus -0.5- 0.9% territory indicating that European monetary policy officials now foresee positive growth across the full spectrum of their scenarios. The bank also mildly raised its inflation expectations but its upper range forecast was still below the key 2% level that ECB targets.
Overall, the ECB remains accommodative in its stance offering “abundant liquidity” in Mr. Trichet’s words but has clearly decided that global economic recovery has taken a firm hold and conditions no longer warrant the policy of open ended credit availability to the financial sector.
The EUR/USD remained volatile in the post press conference trade first spiking to 1.5140 on the more hawkish posture of the ECB, then selling off on fears that the end of easy credit would dampen some of the risk appetite in the region. However, it managed to stabilize near the 1.5100 figure and the net takeaway from today’s proceedings remains mildly bullish towards the single currency. The ECB is now clearly moving to tighten policy while the Fed remains stationary continuing to widen the contrast in approach between the two central banks. With event risk out of the way near term directionality now depends on risk flows and the impact of US ISM Non Manufacturing data on equities as the day progresses.