At yesterday’s meeting, the European Central Bank (ECB) left the main refinancing rate for the euro area unchanged at 1.0%. The deposit rate is 0.25% and the rate on the marginal lending facility is 1.75%. No new information was released in relation to enhanced credit measures.

Market reaction: Following a bit of volatility, German government bonds held stable, and nor was any lasting impact registered in EUR/USD.

Assessment: Yesterday’s statement did not contain any news on the prospective path of interest rates or enhanced credit measures. The only extra information was ECB President Trichet’s stress on the fact that the ECB may actively withdraw surplus liquidity using suitable operations (reverse repos). Trichet also explicitly referred to the relation between the high level of central bank liquidity and the low money market rates (specifically, the EONIA rate is near the deposit rate). The EONIA rate will probably orient itself to the main refinancing rate again when the supply of liquidity is changed. We still believe that a substantial, sustained reduction in central bank liquidity will only start from mid-year and only expect a rate increase of 50bp in Q4 2010.

Once again, one of the topics at the press conference was Greece, and in general countries experiencing critical economic developments and stress in their public finances. A possible exit from the euro area (whether desired or forced) was deemed to be absurd by President Trichet, as the advantages of membership far outweigh the disadvantages. The existing differences between the countries in the euro area were, moreover, quite comparable with the kind of differences seen in other large currency areas (e.g. in the USA). We share the opinion of the ECB.

Recommendation: As there are no risks of a significant tightening in the abundant supply of liquidity for quite some time, we continue to see good support for money market rates and government bonds, even at the decidedly low interest rate levels. A sustained rise in yields is only expected starting from mid-year, in line with the progress in exiting the enhanced credit measures. Our short-term recommendation for EUR government bonds (and Bund Futures) remains Buy.