12 June 2006

EZA 744 Briefing note: ECB Observer

ECB Council Post-Meeting Assessment, June 2006.

·As foreseen, ECB raises its key interest rates by 25 bp but ECB still sees interest rates as 'low' (previously 'very low'), monetary policy still 'accommodative' and Governing Council will 'continue to monitor all developments closely'.

·Inflation projected to remain 'elevated' this year (2.3%, revised up from 2.2%) and next (2.2%) and upside risks to price stability remain over medium term.

·GDP growth moving towards potential, with 2.1% projected for 2006 as a whole and 1.8% (revised down from 2.0%) for 2007.

·Short-term risks to growth 'broadly balanced' but, further ahead, downside risks from global imbalances, possible oil price hikes and protectionism.

·Double-digit credit growth and further acceleration of M3 annual growth rate to 8.8% point to increased upside risks to price stability over medium term.

·If ECB's growth scenario is 'progressively confirmed' by data, 'progressive further withdrawal of monetary accommodation' would be warranted, but no ex ante commitment to increase rates by a certain amount at regular intervals.

EZA Conclusion: Trichet is clearly signalling that further rate rises are likely, but not imminent. We see 31 August Governing Council meeting as a likely opportunity for a further 25 bp increase, to 3%, although deferral to 5 October in Paris is possible to break the quarterly pattern. Growth and inflation projections and talk of progressive withdrawal of monetary accommodation as these are progressively confirmed by the data point to a further hike around the turn of the year with perhaps a further 50 bp, in one or two steps, bringing the 'refi' rate to 3.75% by mid-2007, in line with EZA's previous predictions - see for example EZA732/04Apr06 and subsequent reports

© Graham Bishop