PARIS (MNI) – It didn’t take a rocket scientist to observe that
European Central Bank President Jean-Claude Trichet jettisoned the
bank’s tightening bias on Thursday.

But on the question of what the change means for future rate moves,
there was no clear consensus among ECB watchers. Some said Trichet was
extremely dovish and had paved the way for rate cuts should the
financial situation deteriorate. Others said he was decidedly neutral,
and that rates would likely stay on hold for a long time – with the
direction of the next move anybody’s guess.

The following are excerpts of analysts’ comments:

JOHN DAVIES, WestLB: “Initially, it was disappointing for equities
and other risk assets that there was no rate change of any sort. But
when Trichet said it was ‘significant’ that the policy bias had changed,
the market took that to mean that the bank was now ready to act, if
circumstances require.”

MARIO GRUPPE, Norddeutsche Landesbank: “The ECB has given up its
rate hiking path. One can expect now that there will be no tax hikes
anymore through next year. The ECB is back in a crisis mode. We’re not
expecting that it will cut rates but one cannot rule it out completely
either. Even Deutsche Bank CEO Joseph Ackermann was quoted today as
saying that the current situation reminds him of the autumn of 2008.”

MICHAEL SCHUBERT, Commerzbank: “The ECB delivered a notable change
of tack by reducing its growth projection and highlighting the
particularly high uncertainty and intensified downside risks to growth.
In line with the new forecasts, President Trichet conveyed a much more
sanguine picture of the inflation outlook, thereby signalling steady
rates in the short term. We continue to expect the refi rate to stay at
1.5% this and next year.”

HOWARD ARCHER, IHS Global Insight: “There appears to be a very real
possibility that the ECB could end up trimming interest rates. If the
ECB did cut anytime soon, it would mark a quick policy U-turn given
that the ECB only lifted Eurozone interest rates from 1.25% to 1.50% in
July.”

NICK KOUNIS, ABN Amro: “Trichet was decisively more dovish than at
the last meeting. Although at this moment they are in a wait-and-see
mode, they’ve clearly opened the door to rate cuts if the outlook
deteriorates further. On previous occasions, if they felt that market
expectations for rate cuts were overdone, they would go out of their way
to warn about inflation. Now inflation risks have disappeared and they
are more concerned about growth. If the growth outlook deteriorates
further, meaning we slip into recession, rates will clearly come down.”

MARCO VALLI, UniCredit: “In our view, Trichet’s tone now indicates
a neutral bias: faced with extremely elevated uncertainty, the next rate
change could be either way, although we still think that the ECB’s first
move to address persisting weakness will be to step up its non-standard
measures rather than cutting rates. The acknowledgement that short-term
rates are low and the monetary stance remains accommodative indicates a
fairly high bar for a near-term rate cut.”

PETER CHATWELL, Credit Agricole: “We think that this is going to be
a good platform for them to pause, well into next year. They will
continue to offer liquidity to the banking system, buy Italian and
Spanish bonds as long as needed as perhaps cut the deposit rate as well.
But mainly they are setting themselves up as neutral to give themselves
time to evaluate the incoming data.”

CEDRIC THELLIER, Natixis: “Significantly downward revisions for GDP
growth projections for both 2011 and 2012 and changes in risks
assessments for inflation and GDP growth are clearly illustrating the
more dovish tone of President Trichet. Nevertheless, we do not subscribe
to a rate cut scenario in the following months unless an ‘event’ occurs
from the banking sector and/or sovereign debt market. Our central
scenario is a long lasting status quo accompanying slack growth and
easing inflation pressures all along H2 2011 and 2012.”

CARSTEN BRZESKI, ING: “Further rate hikes are off the table.
However, signals whether the ECB could be willing to go all the way
towards a rate cut were rather Delphic. On the one hand, the official
introductory statement suggested reluctance to make a U-turn on rates,
as the ECB did not cut all hawkish code words. The monetary policy
stance still remains ‘accommodative’, interest rates remain ‘low’ and
not ‘appropriate’, yet. However, during the Q&A session, ECB President
Trichet sounded a bit more dovish, stressing the high uncertainty and
remarking that ‘a very thorough analysis of all incoming data and
developments over the period ahead is warranted.’ All in all, with
today’s meeting the hiking cycle has been aborted and Trichet even
offered some goodies for rate cut fetishists. For the time being, a rate
cut still seems to be one bridge too far for the ECB. However, a further
worsening of the economy and deflationary tendencies could force the
ECB’s hands to act. The tightening bias is gone, but the new neutral
bias has already a slight tilt towards easing.”

JENS KRAMER, Norddeutsche Landesbank: “We don’t think that there
will be any rate hike this year and not until mid-2012. The ECB will
keep the interest rate low. They will also keep offering liquidity at
full allotment. So there is no chance that financial institutions will
run out of liquidity. Will there be a ECB rate cut? I don’t think so. If
they keep the full allotment and accept all sovereign bonds as
collateral, there will be no big difference for Greek banks if the
tender rate is at 1.5% or 1.25% or 1.0%…as long as they can get enough
liquidity. If the ECB decides to cut the repo rate, it would send a
signal that would not be favourable for the constitution of the market
and that would make people nervous. If they have to go back to an even
lower tender rate, it would mean that situation must be worse than we
previously thought.”

–Paris Newsroom, +331-42-71-55-40; paris@marketnews.com

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