–Retransmitting Story Published 12:16 ET Thursday
PARIS (MNI) – Any observer of the European Central Bank who missed
the signals emanating from the Eurotower today would be well advised to
look for a new job.
Fortunately, everybody seemed to understand extremely clearly the
new message delivered by the Jean-Claude Trichet: Inflation is now a
bona fide danger and interest rates are going up next month — barring
an unforeseen disaster — in a pre-emptive strike to avoid second round
effects.
Though Trichet said he was not signaling the beginning of a rate
hiking cycle, it’s unclear what he meant by that. Clearly rates will
rise again after April. The timing on the subsequent ones, however, was
less clear.
Following are excerpts from analyst comments:
KEN WATTRET, BNP Paribas: Assuming the refi rate rises to 1.25% in
April, we forecast another 25-bp hike by July at the latest. A hike in
June would also be possible. The ‘hard’ data flow and the timing of the
next round of staff projections would both support a move in June. We
expect the Q1 GDP print to show stronger growth than in Q4 last year,
which will come out ahead of the June meeting, while the ECB’s inflation
revisions today look conservative. We expect those projections will have
to go up again in June, again potentially opening the door to another
hike. Assuming June is the month, we would then expect further 25-bp
hikes in September and December, with 2% now our forecast for the
refinancing rate at end-year.
ROLF SCHNEIDER, Allianz: It may be a bit surprising [that we could
have an interest rate increase] next meeting. But we already expected an
interest rate hike in the summer of this year. I think that the major
reason is that the inflation rate will stay above 2% in the coming
months and there is a risk that there are second round effects and there
are risks for the anchoring of inflation expectations. Also, I think
that one reason might be that the economic situation is improving at the
moment in the euro area. If you take both together, I think there are
some reasons to increase interest rates over the course of this year. I
don’t expect a cycle, but I also don’t expect that there will only be
one step. We expect two steps over the course of this year. I think that
we will not change this view. We also expect that the key interest rates
will rise next year to 2% or a little bit higher. So, it’s not a cycle
but a normalization of interest rates.
RALF UMLAUF, HELABA: Trichet was surprisingly clear in his remarks.
His sharpened tone let us expect that interest rates will be raised in
April. We even believe that there could be two rate hikes over the
coming months, which still wouldn’t be a rate hike cycle. We believe
that the ECB is actually prepared to counter possible
second-round-effects preemptively. Currently, there do not exist any
second-round-effects. Wage developments on the European level are still
moderate. Thus, this was a clear signal that the ECB wants to counter
any second-round-effects early on.
MARCO VALLI, UniCredit: The ECB is now in “strong vigilance”
posture. In the last tightening cycle, this code word signalled the
intention to raise rates at the following meeting, and there is no
reason to think that things will be different this time. Moreover, the
current level of interest rates is no longer seen as appropriate, and
inflation risks in the medium term have moved to the upside. In the Q&A
session, Trichet further cemented rate hike expectations for April,
although obviously he did not pre-commit. We think that the most
plausible element that could keep them from hiking in April is renewed
market tensions in case of a low-profile agreement at the EU summit at
the end of March…Trichet was much more cautious on the liquidity
front, as the ECB decided to retain full allotment on all the
refinancing operations — including the 3M LTROs — for at least another
three months. This confirms that standard and non-standard measures in
the ECB’s strategy are very much separated. We think that rate hikes
throughout 2011 will take place with full allotment still in place, at
least for weekly operations.
JUERGEN MICHELS, Citigroup: To us a rate hike by 25bp in April
looks now very likely. With such an earlier-than-expected rate hike in
2Q, we expect the ECB to increase rates again by 25bp in 2H. Therefore,
our new forecast for ECB rates at the end of 2011 is 1.5%, up from
1.25%. Previously we expected one hike in 3Q….The ECB statement is
more hawkish than we expected. On the non-standard measures, the ECB was
somewhat more generous than expected by not introducing extra
restrictions for addicted banks. This suggests that Eonia rates will
stay on average 15-20bp below the policy rate in coming months.
TORGE MIDDENDORF, West LB: We were actually kind of shocked by
Trichet’s remarks, by the statement of the ECB in general that they
indicated that they will hike rates pretty soon, and then Trichet’s
remark that the first rate hike might come already in April. In our view
the economic situation in particular on the periphery does not justify a
first rate hike yet. Inflation in our view is mainly caused by oil
prices, and food prices and actually we see no [potential] for these
so-called second round effects, but the ECB is of a different opinion.
We are not sure if this is the start of a rate hike cycle yet. It might
be that the ECB wants to give a first signal that they are ready to act
whenever inflation is too high.
JOERG KRAEMER, Commerzbank: “Trichet said that the bank had not
decided on a series of rate hikes. But he also said something similar in
early 2006, and the ECB then nevertheless raised its key rate many
times. Therefore, we do not expect that a rate hike in April will be the
end of the tightening process. In summer the central bank should
terminate full allotment at least for the three-month tenders and
thereafter it will raise its key rate by 25 basis points at the end of
each quarter (when the new growth and inflation projections are
released). We thus expect the next rate hike for September. According to
our new forecast, we see the key rate at 1.75% by the end of 2011 and at
2.75% by the end of 2012.”
RAINER SARTORIS, HSBC Trinkaus: Trichet’s remarks were surprisingly
hawkish, so one has to expect a rate hike in April, although only a
small one. In our view, the ECB wants to get ahead of the curve. That’s
why Trichet’s remarks were so aggressive.
FEDERIK DUCROZET, Credit Agricole: Big surprise. Even for people
like us who were expecting something very hawkish, even with the new
path priced in by the markets, of course this was a huge surprise
because of the explicit signal. When Trichet used the words “strong
vigilance,” it cannot be more explicit than that. And now we see a 99%
probability of a rate hike next month. In plain language, when you have
a central banker that says there is a possibility and, at the same time,
given that he never pre-commits, there is a very explicit rate signal
next month. The only case, very unlikely in my opinion, where such a
rate hike would have to be delayed is if you get a complete failure of
the EU summit by the end of March and the sovereign crisis escalates
further. But it would take a very strong crisis for the ECB to delay
such a rate hike.
CEDRIC THELLIER, Natixis: After such a strong hawkish and clear
message, it would now be very difficult for the ECB not to hike rates
next month. Nevertheless, as it seems to be an exclusive signaling
reason to avoid second-round effects, it is very hard to say if a [even
one, only one] hike would be effective. But obviously, there is no case
for the beginning of a monetary tightening cycle. In our view, the
global macroeconomic situation in Eurozone (as computed in our augmented
Taylor rule) suggests a second rate hike might not happen before the
second half of 2012. Nonetheless, uncertainty is very high!
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