The European Central Bank left rates unchanged this morning and gave an introductory statement, summed up in the following:
“To sum up, the current key ECB interest rates remain appropriate. Taking into account all the information and analyses that have become available since our meeting on 3 December 2009, price developments are expected to remain subdued over the policy-relevant horizon. The latest information has also confirmed that towards the end of 2009 euro area economic activity continued to expand. However, some of the factors supporting the growth in real GDP are of a temporary nature. Overall, the Governing Council expects the euro area economy to grow at a moderate pace in 2010, recognising that the recovery process is likely to be uneven and that the outlook remains subject to uncertainty. A cross-check of the outcome of the economic analysis with that of the monetary analysis confirms the assessment of low inflationary pressure over the medium term, given the ongoing parallel decline in money and credit growth. All in all, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Medium to longer-term inflation expectations remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term.”
Trichet also added that the ECB “will continue our enhanced credit support to the banking system”, but “will also continue to implement the gradual phasing-out of the extraordinary liquidity measures that are not needed to the same extent as in the past”.
The rate decision and speech were in line with expectations and therefore did not have an immediate significant impact on the markets. With inflation expectations in check and an uncertain outlook on just moderate growth in 2010, look for the ECB to hold rates at 1% for some time, likely through Q1 2010. Look for the EUR to continue to gain on the USD and JPY, and fall against the AUD and CAD.
