PREVIEW: ECB May Rate Decision due at 1245BST(0645CDT)/Press Conference due at 1330BST(0730CDT)
All analysts surveyed currently expect the ECB to keep rates unchanged at 1.00%.
José Manuel García-Margallo (Spanish Foreign Minister) - "This is like the Titanic. If there's a sinking here, even the first-class passengers drown"
It is widely expected that today's meeting will lay foundations for another round of monetary policy easing in June when the governing council will be provided with a new set of macro economic forecasts. However, it is unlikely that Draghi will explicitly state the tools that the central bank will turn to next, but instead, will reiterate that all options remain on the table, including the use of the dormant SMP.
As such, close attention should be paid to the opening remarks by the President, where a shift in the language away from inflation targeting to supporting the fragile peripheral Eurozone, together with a potential reference to extremely high uncertainty, may prompt speculation that another "bazooka-like" program will be announced. In turn, an aggressive retracement in the peripheral bond yield spreads in respect to the benchmark German Bund will likely take place, while the financials sector will most likely end up as the biggest beneficiary in the equity space.
Furthermore, Draghi may imply that unlike other major central banks which slashed interest rates to near zero level, the ECB still has leeway to reduce borrowing rates further. The fact that another rate cut is not yet priced-in gives reason to believe that a statement of this nature may have a more pronounced effect on broad market sentiment than a hint that another LTRO may be employed. A number of ECB members voiced their concern over the use of the LTRO and another rate cut, especially at the time when banks are eagerly awaiting the outcome of the latest Moody's review of the EU banking system should in theory enable easier and cheaper access to various credit markets. This should be most evident in a lower EUR basis swap rate, further reduction in the daily Euribor fixings, as well as the LIBOR rates.
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