ASTRID SCHILO (EUROPEAN ECON): We expect the ECB to raise interest rates by 25bps to 1.5%. This has been pre-announced in the June press conference
by using the “strong vigilance” expression. Since the last press conference, international and European business indicators have weakened. It also seems that inflation has had a negative impact on retail sales. While this is all “less hawkish” news, the ECB is likely to attribute these developments to short-term volatility which occurs in any business cycle. And although inflation is stabilising around 2.7%, it is still above the ECB’s upper limit of 2.0%.
We believe the ECB’s intention will be to signal that it stays in tightening mode. This means that key expressions like “monitor closely”, “upside risks to inflation”, “monetary policy stance is accommodative” have to stay in the statement. In truth, we think lower inflation expectations and slower growth influence the pace of the tightening cycle. Hence, we see a slower pace
after the July increase, with the next 25bps rate move pencilled in for November. Only evidence that weaker growth clearly spills over into Q4 should lead to a delay.
A technical feature is the emergency rate corridor (for borrowing and depositing with the ECB) around the refinancing rate. It is currently at +/- 75pts, while in “normal times”, it should be at +/- 100pts. In April, when the ECB first raised rates, it failed to widen the corridor, but implied this could come at some point. The effect of a wider corridor would be that the floor for the o/n rate would stay at 0.5%, and at the same time, o/n emergency borrowing would become more expensive (at 2.5%). We have little indication on whether the ECB would like to return to the +/-100bps corridor, but think it wouldn’t hurt.
In the Q&A session, the periphery and Greece will again take centre stage. If no official announcement on private sector involvement has been made, or the ECB has not commented publicly on any, the key question will be whether the ECB is willing to accept Greek government debt as collateral.