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06 February 2006

EZA 724: Briefing note: ECB Observer




ECB Council Post-Meeting Assessment
Trichet points more clearly to likely rate rise on 2 March: economic activity was improving and broadening, monetary policy was still accommodative and the markets' short-term expectation of a rate rise 'seems reasonable'. With upside risks to price stability 'progressively augmenting', the Governing Council would 'exercise vigilance', would continue to do what was necessary and would not wait for second-round wage/price effects to materialise. Markets had correctly understood that December's 'not a priori embarking on a series of rate rises' meant only 'no decision to raise rates at every monthly meeting'.

SummaryEZA Conclusion: Trichet appears even more confident than a month ago that a consensus can be reached to raise rates again on 2 March, on the back of further healthy GDP growth numbers, inflation persisting above 2% and continuing strong money and credit growth. We still expect a 25 bp rise in the 'refi' rate then, with a further two 25 bp rises, to 3%, later in the year. But if there are signs that the energy price pass-through is materialising, inflation expectations are moving upwards or second-round wage/price effects are taking hold, the ECB could hoist one or even two successive 50 bp 'storm signals' before the end of the year.

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© EZA


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