Thursday, March 3, 2011

The Hawks have landed

I have been of the view that the ECB would start its next rate hiking cycle by June (see A higher ECB repo rate by June dated Feb. 2). At today's press conference, ECB president Trichet not only mentioned that the inflation risks have moved to the upside - which was largely expected - he also stated that growth risks have become balanced (from downside growth risks). Furthermore, he stated that "strong vigilance" would be warranted, usually a code word that the repo rate will be hiked at the next meeting (which Trichet confirmed when he said that a rate hike was possible at the next meeting, though not certain). In turn, my hawkish view of the ECB has been confirmed. The record low level of the repo rate of 1% was set during the height of the financial crisis and amid deflationary risks. This is just not the case anymore and starting a rate hiking cycle is fully warranted. The inflation as well as the growth environment (as well as monetary developments) suggest that rates should gradually rise over the next 2 years. I expect rates to move to around 2.5% by the end of Q1 2012 and 3% by the end of 2012.

My basic views still hold:

Policy tool


Expected stance

Repo rate (ECB)


Less accommodative

Liquidity provision (ECB)


Ample liquidity

Peripheral bond yields (EFSF)


Less restrictive

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