Certainly this was not a boring ECB press conference, although the market reaction was relatively muted. After a bit of intra-meeting volatility, binds where they were at the start of the presser.
In our view, most interesting things on the monetary policy front were: 1. Apparently the first numbers on 2009 GDP projections that circulated were not correct. Then, during the Q&A session Trichet read the correct numbers and we were massively relieved given that the “misunderstood” figures hinted at a GDP acceleration next year.
2. The staff projections are more or less in line with what we had anticipated. The mid-points for GDP are 1.4 and 1.2% for 2008 and 2009, respectively. Inflation is seen at 3.5% this year and 2.6% next. We think that 2009 GDP growth is still too optimistic, and next year’s inflation projection looks a bit too aggressive to us given the technical assumptions on oil. Probably the ECB sees a higher core inflation and these numbers already embed part of those 2nd round effects that Trichet said are already visible. We interpret this number also as an attempt to dismiss early rate cut speculations. However, without being specific, Trichet also said he expects a return to price stability in 2010. 2010 will be the medium-term from December onwards and this may imply an easing bias in H1 2009 in line with our view.
3. Trichet restated that he has “no bias” and to a specific question clearly answered that he is the only one speaking on behalf of the Governing Council. This is a clear message to Weber and those other hawks who recently deemed the refi rate as “accommodative” and hinted at the possibility of another rate hike. So we have to assume that the Council has a neutral posture and the hawks now remain a (vocal) minority.
4. The first key paragraph of the statement contains only one relevant novelty. Money and credit expansion is no longer seen as vigorous, and only monetary base keeps showing a sustained dynamics. This is a somewhat more dovish remark, also because it accompanies the statement in the monetary analysis that M3 is overstating the true monetary expansion. They are becoming progressively aware that the liquidity cycle may have turned. In our view, the monetary analysis will prove a useful tool for them to assume a more relaxed posture in the future.
5. On the growth front, the ECB remains rightly cautious in buying too much from the recent oil drop. More in general, among the lines, in Trichet we saw an increased awareness that we are headed toward tough times. Yes, we are in the middle of a trough (Q2 and Q3), but the recovery will be gradual.
Bottom line: No rate cuts anytime soon. But the next move will be a cut and we remain convinced that it will be delivered sometimes in the second quarter of next year when inflation will have decisively declined toward 2% and the economy won’t be out of the woods yet. The period of below-par growth will be rather prolonged and the central bank will have to take stock of this softness and, with inflation well behaved again, act accordingly.