The ECB raised the refi rate by 25 bps to 1.5% as expected and kept the emergency rate corridor around the refi rate at +/- 75pts. Rates are still viewed as accommodative and inflation risks are still to the upside. Hence we maintain our view that the ECB will continue to normalise interest rates at a slower rate from here given the recent softening in growth. We expect the next rate rise in November.
RATES AND LANGUAGE
The ECB raised the refi rate by 25 bps as expected and kept the emergency rate corridor around the refi rate at +/- 75pts. There has been some speculation that could be normalised to the pre-crisis range of +/- 100pts, which would have kept the o/n rate at 0.5%, and made the o/n emergency borrowing more expensive (at 2.5%). Mr Trichet gave no explanation other than to describe it as “appropriate”. It is still likely to happen at some point. The statement was re-ordered a little but basically unchanged, particularly on inflation. There was a little more focus on the softness of the Q2 data but Mr Trichet was quick to point out that this had been largely anticipated and that, from a monetary policy perspective it was necessary to look through such short-term volatility and focus on the medium term. On the key words we are back to rates still being “accommodative” and the need to “monitor very closely” implying ongoing normalisation but no move in rates next month. We maintain our view that the ECB will raise rates at a slower rate from here given the recent softening in growth and stabilisation in inflation and expect the next rate rise in November.
COLLATERAL AND DEFAULTS
The Q&A was predictably dominated by questions on the periphery and, in particular, issues of collateral, defaults and ratings agencies. The only new information provided was confirmation that the collateral rules for Portugal, following the recent ratings downgrade, would be suspended. This was fully expected given the precedent had already been set with regard to Greek and Irish debt. On all of the other numerous questions regarding the possibility of Greek debt being downgraded to Selective Default (SD) as a consequence of any of the private sector involvement proposals currently being negotiated, no new information was given. Most of the questions were batted back to governments with Mr Trichet simply reiterating (persistently) that the ECB “says No” to selective default. Note, however, that Mr Trichet did not explicitly say that Greek government debt would not be accepted as collateral in the event of being downgraded to SD. In response to questions on the ratings agencies, Mr Trichet appeared critical of the recent action on Portugal and listed the shortcomings of the agencies (including their pro-cyclicality and oligopolistic structure) but admitted that, although it was sub-optimal, it was a complex problem which needed to be reflected on at the global level.
BOTTOM LINE
The ECB intends to proceed with further policy normalisation but there is likely to be a slower pace of rate rises from here