Trichet Explains Why He Did It


The headline: Don’t expect a rate hike next month, though another sharp spike in energy prices due to Middle East instability could trigger such a move. This is not the first in a series of hikes, according to Trichet.

Trichet says ECB has “been ahead of the curve,” and recommends other central banks do the same.

Did not decide that this is the “first in a series” of rate hikes. They will decide on future policy at the time of the next meeting. The ECB has encouraged Portugal to ask for support, according to Trichet. ECB’s rate decision was unanimous.

Questions are now beginning.

Update 8:45 AM ET: Trichet’s comments indicate another rate hike next month should not be expected. Energy costs remain the key driver of inflation in the eurozone, so the risk remains that further instability in the Middle East resulting in price rises could force the ECB to act again next month. But, again, “monitor very closely” does not indicate another hike is likely, nor does his comment on “very accommodative” policy.

Trichet is explaining that the ECB has made this decision to hike rates to maintain inflation around the target 2%. “The stance of monetary policy remains accommodative,” he says.

Monitor very closely,” he says; likely means there won’t be a rate hike in May.

Explains energy costs as the key driver of inflation, from Middle East instability.

Risks to price growth remain on the upside, due to energy prices, Middle East instability, emerging markets commodity demand, and rising taxes in eurozone, according to Trichet.

M3 growth is picking up, bank loans to private sector are increasing.

The ECB’s press conference on the current economic situation in the eurozone and its policy decision will begin at around 8:30 AM ET.

We’ll be covering it live. You can watch it live here >

Earlier, the ECB decided to raise rates by 0.25%, to 1.25%. This was expected.

Steven Englander of Citi suggests some key language one should be listening for in Trichet’s comments.

From Steven Englander:

Our economists expect ‘ the ECB will regard the current interest rates as “accommodative”, maybe even “very accommodative”. But, the ECB is unlikely to use the phrase “strong vigilance” in order to herald a rate hike in May. Instead we expect that the press statement will use the phrase “monitor closely” in April, suggesting that there is some time to go before the next rate hike is on the cards..’ 

Our economists expect the policy rate to be 1.75% at the end of Q1 2012 which is less than what the market is pricing in, and leaves room for some EUR pullback if either ECB comments or incoming data show ambiguity with respect to the strength of the recovery.

We think the language that our economists expect would be viewed as dovish relative to what is priced into the FX market. ‘Accommodative’ and ‘monitor closely’ will probably not match the intensity of inflation concern that has recently been priced into the market expectations and the EUR. If there is language that suggests they saw their move as a ‘pre-emptive strike’ or that medium-term inflation expectations ‘very well anchored’ or that they do not see major risks of second round effects, that would be similarly dovish in FX terms.

Read more about that rate hike here >