Introducing a tracker rate for three-month LTROs

The ECB Governing Council left its key interest rates unchanged, describing the monetary policy stance as accommodative. As expected, after strong hints from Bundesbank's Weber, the Council also extended its fixed-rate liquidity provision with full allotment for as long as necessary, until at least 18 January 2011. The main surprise was the switch to an MRO tracker rate for the October, November and December three-month LTROs. In the absence of inflationary pressures, the ECB will remain on hold for the foreseeable future. We forecast a first 25bp hike to 1.25% in December 2011.


Liquidity provision changes after a consensus decision

President Trichet indicated that while the decision to leave its key interest rates unchanged at 1% had been unanimous, the announcements on the provision of liquidity had been agreed by consensus. Nevertheless, the phasing out of non-conventional measures continues. The decision to extend fixed rate full allocation tenders was not only driven by technical smoothing concerns, but also because the situation remains "complex". We interpret this as meaning tremendous reliance on ECB liquidity by numerous peripheral financial institutions.


Extra fine tuning operations and the separation principle

The ECB will carry out three additional fine-tuning operations at full allotment and fixed rates. The 30 September and 11 November operations will be for six days, while the 23 December one will extend over 13 days. ECB president Trichet was insistent that the decision to proceed with the gradual withdrawal of special liquidity operations should not be construed as a monetary policy signal. These remarks were similar to those made in late 2009 when the ECB first introduced the MRO rate tracker over the life of the third and final 12-month LTRO. He again made reference to the "separation principle" between monetary policy decisions and liquidity injections, repeating comments made last year.


Sizeable upward revisions to GDP staff projections

The introductory statement noted that recent data and survey evidence "continue to indicate a positive underlying momentum of the recovery in the euro area". This was a stronger language compared to July. With the sizeable ratcheting up of the GDP growth mid-points - to 1.6% for 2010 and 1.4% for 2011 - in the ECB staff projections, Trichet was even more inclined to argue that a double dip was not on the cards than at the previous meeting. Nevertheless, he referred to the GDP forecasts having slight downside risks given the prevailing uncertainty.


Inflation expectations firmly anchored

Trichet noted the exceptionally firm anchoring of inflationary expectations. There were modest upwards revisions to the mid-points of the inflation projections - to 1.6% for 2010 and 1.7% for 2011 - on account of higher commodity prices, with slight upside risks reflecting potential increases in indirect taxes and administered prices that might become required to facilitate budget consolidation.