Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

08 May 2006

EZA 738 Briefing note: ECB Observer




ECB Council Post-Meeting Assessment, May 2006.


ECB leaves interest rates unchanged, as foreseen, but ECB still sees interest rates as very low and monetary policy accommodative, and strong hints again of 8 June rate rise. Possibility of 50 bp June rise not denied by Trichet, but EZA sees 25 bp as more likely. Growth rate seen as on track at around potential, with risks still broadly in balance but oil price moves add to downside, while upside inflation risks increase. Inflation set to stay above 2%, with continuing oil-price pass-through and impacts from indirect taxes and administered prices in 2006 and 2007, while upside risks remain. Cross-check from accelerating money/credit growth, fuelled by low interest rates, and 'ample' liquidity', points to upside inflation risks persisting over medium/longer term. Present 'normalisation process' points to a further 25-50 bp rises to 3.0%-3.25% by end-2006 and 'neutral' 3.75%-4.0% by mid-2007, with possible need for overshoot in late 2007. Speed/timing of post-June rate increases will not necessarily fit regular quarterly 25 bp pattern but will depend each time on latest economic and monetary analysis.

EZA Conclusion: Trichet's remarks further reinforce EZA's view that there will be a 25 bp increase in rates, to 3%, (and just possibly a 50 bp hike to 3%) in June and that further increases to a broadly 'neutral' 3 3/4% - 4% in the course of 2007 are foreseen but neither the ECB's Executive Board nor its Governing Council see themselves as pre-committing to the achievement of a particular level of interest rates by a specified date. The timing and scale of any move will continue to be determined only by their pragmatic assessment of all the available, past and current, economic and monetary data.



© Graham Bishop

Documents associated with this article

EZA738.pdf


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment