Friday, April 8, 2011

COMMENT: ECB - Not a series? - IFR

LONDON Apr 8 (IFR) - There is a lot of focus on the comments from Trichet that this is not the start of a series of rate hikes. For those that might believe this to be true first take a look at what Trichet said during the Q&ampA at the Dec 1 in 2005 "We are not engaging, ex ante, in a series of interest rate increases. And, as I have said, we will continue to monitor closely all developments with regard to risks to price stability". Subsequently the ECB followed this with 125bps hikes during 2006.
We currently are sticking with the view that we will see at least 100bps in the current tightening cycle and look for the next hike to be delivered in July. There is the risk that it can happen in June (and the market is 50/50 between a June or July hike) but without more ECB speak we are not inclined to change our call. The key over the coming weeks will be to keep an eye on money markets to see how the new higher deposit rate floor impacts liquidity parked at the ECB. With excess liquidity currently around 10/15bn there is going to be a very significant impact on EONIA with the market already priced for the o/n rate trading closer to the refi rate.
The financial market impact has already been seen with further upside on EUR/USD as well as a flatter yield curve likely to remain strategic plays at least until the Fed looks to signal its exit.
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