30 November 2005

EZA 715: EZA Briefing note: ECB Observer

ECB 1 December Council Preview – Data Update
New indicators in past two days on balance slightly help ECB's argument for a rate rise tomorrow. Detailed GDP data will increase ECB's confidence that recovery is broadening, while continuing rapid growth of M1 and private sector lending will add to inflation concern despite slowing of M3 growth. On the other hand, 'doves' could point to economic confidence, which slipped slightly in November, and headline inflation, which eased a little further in November, to 2.4%. EZA Conclusion: We maintain odds on a 50 bp rise but recognise a 25 bp compromise still possible. Detail 1.New data for several key indicators have been released in the past couple of days, which do little to clarify the recent mixed economic picture but which, on balance, if anything reinforce slightly the case of those in the ECB Governing Council arguing for a rate rise tomorrow: According to the 'flash' estimate, 'headline' inflation in November fell to 2.4%, from 2.5% in October. This was despite a slightly unfavourable (0.1%) year-ago base effect and implies a month-on month decline in the index of 0.2%. This will strengthen the hand a little of any 'doves' there may be still in the Governing Council. First full data for Q3 GDP confirm the 'flash estimate of 0.6% and show more broadly-based domestic demand, with a strong rise in gross fixed capital formation contributing 0.3 pp to GDP growth and consumer expenditure and government consumption contributing 0.2 and 0.1 pp respectively and stockbuilding making a negative contribution of 0.3 pp. Net external trade, which had made a small negative contribution in Q2, also made a positive contribution of 0.3. This will help boost the ECB's confidence that a more balanced recovery is now underway. The Commission's two main survey-based confidence indicators, the Business Climate Indicator and the Economic Sentiment Indicator both retreated slightly in November, the former still staying above its long-term average and the latter edging only just below. No strong argument for either side here although it does suggest that confidence is still fairly fragile. The annual rate of M3 growth slowed, from 8.4% to 8.0% in October, leaving the three-month average of annual growth rates unchanged at 8.2%. The annual rate of M1 growth edged back up from 11.1% to 11.2% and the annual rate of growth of lending to the non-bank sector accelerated from 8.9% to 9.3%, with loans for households and consumer credit both accelerating further. The first slowing of M3 since March may be greeted with some relief but it will be alloyed by the fact that M1 is still driving the monetary momentum and that private sector lending continues rising uncomfortably fast.

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© Graham Bishop