At Thursday’s ECB, president Trichet is expected to leave the main-refinancing rate unchanged at 1% and reiterate the view that current interest rates are ‘appropriate’ while ‘the risks to the economic outlook are broadly balanced in an environment of uncertainty’. Market’s focus will be on the press conference where Trichet will announce the new set of staff macroeconomic projections and extend emergency support for the Eurozone until early 2011.
Economic data released in the 16-nation region in recent weeks has been stronger than expected. GDP increased +1% q/q in 2Q10, the fastest pace in 4 years. The strength mainly came from Germany where the economy expanded +2.2%, the biggest growth in 2 decades, as driven by robust exports and investment activities. Growth was also better than expected in France. The economy expanded +0.6% in the second quarter after an upwardly revised +0.2% growth in 1Q10. Despite the robustness, moderation is anticipated in the second half of the year as slowdown in China and the US may reduce demand for Germany’s exports. Meanwhile, consumer prices in the Eurozone soared +1.7% y/y in July after rising +1.4% in June. This was the fastest pace since November 2008.
However, performance in peripheral European countries was disappointing. While both Spain and Portugal reported mild growth of +0.2% q/q, Greek GDP contracted for the 7th quarter, by -1.5%, in 2Q10. Fiscal consolidative measures implemented to reduce deficits have taken their tolls. The split between core and peripheral economic developments and slowdown in the US should make the ECB cautious on the growth prospect and maintain a ‘balanced’ economic outlook.
Bundebank President Axel Weber’s comments 2 weeks triggered speculations that the ECB will delay the exit schedule. Weber said ‘for the October operations I’m very strongly of the view that we should maintain the current allotment mode, full allotment for the three-month operation’ and ‘most of these discussions about the continuation of the exit I think will be focused on the first quarter’. With such comments from a hawk like Weber, it’s very likely that the central bank will maintain full allotment for weekly, monthly and quarterly refinancing operations for the rest of the year.
Trichet will also announce the latest set of staff macroeconomic projections. GDP growth will likely be upgraded to +1.3% for 2010, from +1.2% forecast in June, as driven by a stronger first quarter. Growth for 2011 will probably stay at +1.2%. We expect few changes in inflation projections with HICP for 2010 and 2011 staying unrevised at +1.5% and +1.6%.
