Posted on August - 31 - 2010
ECB meeting: A double dip is not on the cards
Taking a pause on the exit path
As expected the ECB kept all its key interest rates unchanged. The ECB also decided that it will conduct its main refinancing operations (MROs) and its special-term refinancing operations with a maturity of one maintenance period as fixed-rate tender procedures with full allotment until at least the end of the twelfth maintenance period on 18 January 2011.
In addition the ECB will provide three new three-month long-term refinancing operations (LTRO) with full allotment at a fixed rate corresponding to the average rate of the MROs over the life of the respective LTRO. These operations will be carried out in October, November and December. It was fully in line with our expectation and not that big a surprise given Weber’s comments on 20 August.
In addition to these measures, the ECB is expected to smooth out potential liquidity tensions by undertaking three fine-tuning operations on 30 September, 11 November and 23 December when 6M and 12M LTROs mature. A fine-tuning operation was also put in place when the one-year LTRO matured on 1 July.
No double-dip
In the Q&A Trichet said that he is not anticipating a double dip: “A double dip is not on the cards in our own analysis”, he said. Asked about US growth he said that he was not too disappointed: “What we see is more or less what we had in mind”. Trichet noted that he did not expect very dynamic growth. This is in line with our expectations of an early mid-cycle slowdown with growth not far from trend for the rest of the year.
New staff projections slightly more upbeat
The quarterly update of staff projections included upward revision of 2010 GDP expectations by 0.6 percentage points, while 2011 GDP projections were increased 0.2pp to 1.4%. The large upward revision for 2010 is caused by the very strong Q2. The new forecast is compatible with growth around 0.3% q/q in Q3 and Q4. We expect that growth will be slightly higher. The upward revision of 2011 partly reflects an improved outlook, but is primarily a result of the positive Q2 10. Trichet noted that confidence can counter the negative impact of fiscal tightening”. Trichet also talked enthusiastically about such expansionary fiscal contraction at Jackson Hole on 27 August.
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