05 December 2005

EZA 716: Briefing Note

ECB Council Post-Meeting Assessment, December 2005.
Trichet admits 25 bp rate rise on 1 December was a compromise between Governing Council's members who wanted 50 bp and those seeking to delay any move. Says again this was 'not an ex ante decision to engage in a series of rate increases' but ... ... Also says policy remains accommodative and interest rates remain low in nominal and real terms; downgrades significance of 'core' inflation measures in current context. Latest Staff projections revise GDP growth figures up slightly for 2005 and 2006 and inflation revised up for 2006; 1.9% GDP growth and 2.0% inflation projected for 2007. Potential growth rate in eurozone over the shorter term seen as 'just below 2'%. Monetary analysis still showing increased risks to medium-term price stability.

SummaryEZA Conclusion: Before 1 December we had argued that, if a rise of only 25 bp emerged, this would be because a compromise had to be reached between those seeking delay and those wanting 50 bp. So it proves. We still maintain that 25 bp is too weak a signal that will not have sufficient impact to allay underlying concerns. We therefore expect a further 25 bp or even 50 bp move in 3-4 months' time.

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© Graham Bishop