ECB to maintain exit focus after Fed stimulus push

By Marc Jones

FRANKFURT (BestGrowthStock) – The ECB is expected to show no sign of veering off the crisis exit path at its meeting later on Thursday, amid escalating fears about debt-choked euro zone members and a renewed push by the Federal Reserve to kick-start the U.S. economy.

All 80 economists in a recent Reuters poll predicted the ECB will leave rates at a record low 1 percent for the 18th consecutive meeting this month.

With policymakers likely to wait until December to decide if they can continue to reel in the ECB’s crisis support measures, economists expect the bank to stick to its view that the euro zone’s recovery has enough momentum to ride out any bumps.

The bank’s stance is supported by encouraging euro zone data. But it is leaving it looking increasingly isolated among its advanced economy central bank peers and applying upward pressure on the euro.

The U.S. Federal Reserve announced on Wednesday it would start printing money again to try and fire the sluggish U.S. economy. The Bank of Japan led the way with similar moves last month.

“The ECB is likely to stand on the opposite side of the fence to the Fed and prepare the market for a continued withdrawal of its support measures,” said Citi economist Juergen Michels.

“They are on totally different pages of the script. Unless the ECB sees a risk of deflation, or there is another really severe intensification of financial market tensions, it is unlikely to change its stance.”

The ECB will announce its interest rate decision at 1245 GMT and President Jean-Claude Trichet will hold a news conference at 1330 GMT (9:30 a.m. ET).

J.P. Morgan economist Greg Fuzesi thinks the ECB may tweak its policy statement to reflect its increasing confidence in the economy in the wake of recent data.

A rise in manufacturing output in 16-country bloc last month dovetailed with a wider global improvement. Euro zone economic sentiment also exceeded expectations, while ECB lending data has fueled hopes the long downturn in credit may finally be over.

“In terms of risks, the ECB will likely see those slightly on the upside for inflation (as it did last month), but it will be more interesting to see if the growth risks are upgraded from “slightly tilted to the downside” to “broadly balanced,”” Fuzesi said.

RENDEZVOUS

Despite the rise in headline euro zone inflation to 1.9 percent last month, the ECB is seen sticking to the view price pressure are contained and remain moderate.

If he sticks to form, Trichet is expected to dodge questions on whether the ECB will press on with removing its crisis support and say that the next meeting on December 2. is the “rendezvous” for the decisions.

Although banks in debt-choked countries such as Greece and Ireland remain firmly locked out of open markets, analysts currently expect the ECB to keep its exit rolling by putting a limit back on its supply of 3-month loans from mid-January.

Also of interest to money markets will be whether Trichet adds any weight to recent suggestions from ECB members Axel Weber and Guy Quaden to try and wean dependent banks off ECB support.

The recent volatility in foreign exchange market (Read more about international currency trading. )s will be another hot topic. The rise of the euro has calmed over the last month, but jumped above $1.41 after the Fed announced plans to buy $600 bln of bonds by the end of Q2 next year.

Analysts at RBS expect Trichet to: “repeat sentiments… that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability and that he considers it important the U.S. authorities have confirmed their strong dollar position.”

SANCTIONS

Trichet is also likely voice his concerns about European leaders’ decision to jettison ECB-backed plans for automatic punishments for overly-indebted countries in favor of German-led proposals for a default mechanism.

Other ECB policymakers have already voiced their anger but Board member Lorenzo Bini Smaghi revealed a switch in focus last week with calls for Europe’s bail-out fund to get preference over the private sector in any default.

“Trichet will make it clear that they would have preferred an automatic sanction process and a more market friendly approach rather than the involvement of the private sector in any default,” said Citi’s Michels.

“It still remains completely open what the crisis mechanism will look like and the ECB will try and use all its weight to influence the outcome.”

The premiums investors demand to hold Greek, Irish and Portuguese debt rather than that of power-house Germany have hit record levels since the EU leaders’ deal last week in Brussels.

The tensions will be another of the main focuses of the post-decision press conference, as will be Bundesbank arch-hawk Weber’s renewed criticism of the ECB’s controversial government bond purchases which have come to a halt in recent weeks.

“A major Q&A theme is likely to be the permanent crisis resolution mechanism and whether the ECB’s bond purchase program should be stepped up again given the escalation of periphery concerns,” said RBS.

(Reporting by Marc Jones; Editing by Ron Askew)

ECB to maintain exit focus after Fed stimulus push