13 January 2009

EZA 876 Report: ECB Observer

ECB 15 January Council Preview
 

DEEPENING RECESSION AND SHARP SLOWING OF 'HEADLINE' INFLATION POINT TO PROBABILITY OF 50 bp ECB RATE CUT THURSDAY, BUT 25 bp NOT RULED OUT

· Eurozone recession seen deepening in 2008 Q4, with upturn unlikely until late 2009.

· 'Headline' inflation rate drops to just below ECB's comfort zone and likely to remain there for most of first half of 2009, with some (still slight) risk of deflation.

· External cost pressures continue to subside, partly aided by euro strengthening.

· Money and credit growth continue to slow but underlying expansion still well above official reference value liquidity overhang still wide and continuing to increase in real terms.

· Increased downside risks to economic activity and prices, coupled with continuing financial market tensions, point to a further cut in ECB rates, with continuing division within Governing Council about need for immediate further large rate cut and those favouring more measured approach, waiting to see effects of latest rate cuts and government interventions.

· EZA sees likely compromise on 50 bp cut on Thursday, taking 'refi' rate to 2.0%, with further 50 bp cut in next few months.
 

© EZA