ECB Hiked Rates

DNB markets dealingroom in oslo

(08.04.2011) ECB hiked key policy rates, but Bank of England is still on hold. Both as expected.

By Kyrre Aamdal, Senior Economist at DNB Markets

The Euro strengthened tonight versus the US Dollar, but not as a direct response to the ECB statement. This was probably more a dollar movement, because the Euro was quite stable versus sterling and Scandinavian currencies. A major aftershock in Japan contributed to lower the US stock markets, but the declines were limited. In Japan the Nikkei 225 increased almost 2 per cent today. 

ECB decided yesterday to increase the refinancing rate by 25 basis points to 1.25 per cent. This action was broadly expected in the markets, and the EURUSD exchange rate was unaffected of the decision.

The key policy rate has been left unchanged 1.00 per cent since May 2009. The decision was unanimously. Trichet did not repeat the statement ”strong vigilance is warranted”, thus indicating the rate will be unchanged at the next meeting in May. Instead the press statement included the expression ”monitor very closely”. Previously, in the rate hike cycle, this expression indicated a hike after the next meeting. Trichet did not describe the rate level as ”appropriate”. If so, it might have been a signal that further rate hikes was put on hold.

To summarize: the key words from ECB signal another rate hike before summer. According to the ECB risks to the medium-term outlook for price developments remain on the upside. ”The risks to this economic outlook remain broadly balanced in an environment of elevated uncertainty” ECB stated. However, the recovery in activity is expected to be dampened somewhat by the process of balance sheet adjustment in various sectors. The markets seem to price in 25 basis points hike each quarter to the end of 2012. We believe ECB would be more careful and only hike once more this year.

Bank of England kept key policy rates unchanged at yesterday's meeting. Also the bond purchasing program was unchanged. When the policy remains unchanged, BoE do not produce any statements. We thus have to await the minutes to see if there have been any changes in the voting. The minutes will be released in two weeks.

In the US the deadline for the Congress to agree on the federal budget expires at midnight. Without an agreement, the government would begin shutting down for the first time in 15 years. Roughly 800' "non-essential" federal employees would be furloughed, affecting a host of government services. The previous shut-down took place in November and December 1995, with respectively 6 and 21 days. Government expenses fell annualised 14.2 per cent and contributed to reduce GDP by 1 per cent. In 1995 the economy was growing strongly. This time the recovery has just got a foothold and is more vulnerable to set backs.

Norwegian manufacturing production went down 0.3 per cent from January to February 2011, according to seasonally-adjusted figures released yesterday. Shutdowns for maintenance and extraordinary stops in production have affected the output in food products and paper and paper products in February 2011. However the output in industries like machinery and equipment and ships, boats and oil platforms saw an increase from January to February 2011. From mid-2010 the production level has been more or less constant.