Will ECB Provide a Plan for an Exit?
A expected the ECB left its benchmark rate unchanged at 1% and attention now turns to President Trichet’s press conference at 13:30 GMT. The key issue for the FX market is whether Mr. Trichet will provide further guidance and a possible timetable to the removal of ultra accommodative monetary policy that has been in place as a response to the global credit crisis triggered by the Lehman bankruptcy last year.
One point of speculation has centered on the ECB’s monthly tender which up to now has been set at 1% lending rate in unlimited quantity. Some market players have suggested that the ECB may move to variable rate terms in the near future, thus slowly tightening credit conditions in the region.
Economic data from the Eurozone has been generally positive with tonight’s final reading for PMI Composite printing at 53.7 as expected showing fourth consecutive month of expansion. However wide gulf in performance between the North and South remains in place with German PMI Services data printing above the 50 boom/bust level at 51.4 but Italian PMI readings slipping to 49.8 from 52.2 expected while Spanish business activity fell to 46.1 from 47.7 the month prior.
It remains to be seen whether the ECB will err on the side of caution preferring to wait for business activity in the South to pick up pace or whether the policymakers in Frankfurt will move aggressively to tighten monetary conditions on the assumption that the momentum of the economic recovery will lift up the laggard economies of Italy, Spain and Greece in the near future.
We will have a further update after Mr. Trichet’s comments.
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