Daily analyst comments

At a regular session on June 4, ECB adopted a decision to keep its base interest rate at 1.0%. The bank has thus decided to put a stop to a series of seven rate cuts, which began in October 2008, and have reduced the rate by 3.25%.

At a press conference, the ECB chairman stated that the current interest rate level is adequate given the current economic environment. The bank does not plan to cut the rate further any time soon or increase the amount of funds for the buyout of bonds. Therefore, the total buyout of bonds on the market will remain at a level of EUR 60 billion.

The ECB has also updated its forecast for the rate of inflation and GDP. In particular, GDP in the euro zone is now projected to shrink in the range of 4.1% and 5.1% in 2009, and contract between 0.4% and 1.0% in 2010. However, the pace of a GDP contraction is expected to slow in the second half of the year. The bank expects positive full-year inflation, but does not rule out the possibility of deflation in individual months.

The ECB’s plans to restrain growth in the money supply have triggered a positive reaction on the foreign exchange market. We note that the bank’s actions continue to be more conservative as compared with the moves undertaken by other major central banks around the world. On one hand, the ECB policy may drag out the process of economic revival; on other hand, such a policy reduces inflationary risks, and this should have positive effects on the EU economy in the long run.