08 January 2005

EZA 693: ECB 04 August Council Preview

ECB Council Preview - futures market still underestimating ECB inflation concerns
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SummaryAS LAST TIME, NO RATE CHANGE SEEN THURSDAY, EVEN WELL INTO 2006: DEMAND PRESSURES WEAK BUT INFLATION RISKS RISE A LITTLE FURTHER · Expect no rate change at 4 August ECB meeting; EZA sees rates likely to remain on hold through to 2006 Q2. · Economic activity and demand pressures remain weak, domestic cost and price pressures still largely contained. · 'Headline' inflation rises to 2.2% but 'core' inflation remains subdued. · Slight improvement in business confidence, hint of rise in inflation expectations and accelerating money/liquidity/credit growth together tilt balance of argument a little further towards risks to price stability over medium term. · EZA still sees futures market underestimating ECB's inflation concern and mispricing likely timing and scale of ECB tightening in 2006.

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© Graham Bishop