ECB President Trichet

Lost in the payroll news was the ECB press conference where ECB Pres Trichet hinted that interest rates should remain at the 1% level. He is definitely not in the deflation camp when he says that negative inflation will be short lived and is due more to temporary factors (aka falling food and energy prices y/o/y predominantly). He however is not worried about inflation as he believes expectations are firmly anchored. He believes the euro zone economy will remain weak but the pace of contraction will continue to slow and a recovery will begin in mid 2010. With respect to their version of QE (focusing on a specific part of the market instead of monetizing government debt), the purchases of covered bonds will begin on Monday. They haven’t spent a penny yet but that market has gotten dramatically better over the past few months right after they first announced it.

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