06 November 2005

EZA 709: Briefing Note: ECB Observer

ECB Council Post-Meeting Assessment, November 2005.
Governing Council maintains last month's sharper tone: current monetary policy stance remained 'appropriate' but 'strong vigilance' was warranted. Balance of argument tilts further towards upside risks to price stability, with inflation now expected to persist higher and for longer than foreseen in the summer, but no clear evidence yet of domestic inflationary pressures building up. Latest indicators suggest economic activity currently strengthening Signs that concern about monetary developments is coming increasingly into play. Break-even inflation showing a tendency to go up; being monitored very closely. Outlook for Excessive Deficit countries a 'matter of great concern'. Governing Council stands ready to act at any time 'without being tied by pre-commitments' and would not wait for inflation risks to materialise. ECB bats the 'Fazio Affair' back to the Italian authorities, at least for now.

SummaryEZA Conclusion: The day of reckoning is coming closer as each month passes, but our central expectation remains a 25 bp increase in March or April 2006 as domestic demand growth is seen to be returning to trend, with a further 25 hike in May or June. However, the risks of second-round inflation effects and of deteriorating inflation expectations have risen and concern about monetary developments and irresponsible fiscal policies is increasing. The odds on the ECB feeling obliged to act pre-emptively with an earlier (January or February) and/or larger (50 bp) rate rise have therefore shortened.

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© Graham Bishop