Published: Thu, 05 Feb 2009 13:08:33 +0100

EU Preview: ECB Expected to Leave Rates Unchanged at Thursday's Meeting (Repeat)

ECB President Jean-Claude Trichet has repeatedly said the Governing Council meeting in February is not considered "an important meeting for policy making."

In fact, out of 53 economists surveyed by Bloomberg, all but one expect the refi rate to remain at its current rate. The lone dissenter, however, is looking for a modest cut of 25 basis points.

As of the close on Tuesday, the Euro Overnight Index Average markets were pricing in only a 3% chance of a 25bp hike by Feb. 5, 2009.

Agreeing with the consensus, Helaba economist Ralf Umlauf is looking for the ECB to keep rates on hold in February and resume its rate cutting cycle in the following month.

"All the arguments [for cuts now] are very clear," the economist said, noting the downside surprise in inflation in January, as well as the record lows in a number of sentiment and activity indicators.

"It's also very clear that Trichet and his colleagues know about that," Umlauf added. "So, we expect the professional forecasts will be lower for GDP and inflation in the euro zone. But, we don't believe that this will affect the February decisions from the Governing Council."

Despite easing inflationary pressures and what would appear to be a long and deepening recession in the euro zone, Umlauf suggests that the cut in March, expected at 50 basis points, would likely be the final one for "some months."

"The ECB is still watching inflation expectations in the midterm," Umlauf said. "[Despite] the fact that..current inflation is down and maybe will be negative in the next month, midterm inflation expectations are still elevated and that is a problem for the ECB council to go to zero rate policy or anything else."

Like Umlauf, Dresdner Kleinwort economist Claudia Droyer is fully expecting rates to remain at 2.0% this month. However, unlike her counterpart at Helaba, Droyer does not think the recent data releases give any reason for the ECB to shock the markets and cut unexpectedly.

"In the last meeting, Trichet said that they already anticipated some bad data, that this was already included," Droyer said.

Droyer said while sentiment indicators continued to decline in January, the rate of decline was slower than previous months, suggesting that confidence is beginning to stabilize. "And, the surprise on inflation, I would not weigh that too heavily," the economist added.

"They did a move three weeks ago and they will probably move in March," Droyer said. "So, no move this week."

Also in line with forecasts from Helaba, Droyer is expecting the ECB to reduce its main refinancing rate by 50 basis points in March to 1.5%, where rates will likely remain.

"This will be the so-called end of the cycle because stabilization tendencies in the economy will become more obvious," she said. "We won't see any deepening of the financial crisis, but more or less a gradual calming down of the situation."

By Todd Wailoo, twailoo@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca

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