04 July 2006

EZA 747 Report: ECB Observer

ECB 6 July Council Preview

NO RATE RISE SEEN THURSDAY OR ON 3 AUGUST, BUT 25 bp LIKELY 31 AUG, AND ANOTHER 25 bp BY DECEMBER, WITH 3.75% 'REFI' RATE EXPECTED BY MID-2007

·Slightly less clear economic picture this month than last, but balance still tilted to upside inflation risks rather than downside risks to growth.

·'Headline' inflation still 2.5%, but no major sign yet of increasing pass-through from external costs or of major second-round wage/price risks, and inflation expectations recede.

·Monthly data show patchy picture of economic activity at start of 2006 Q2 but ...... ·...... latest monetary data further reinforce already-acute medium-term inflation worries.

·Key new data for ECB's economic analysis, allowing the 'slow' camp to catch up with the 'faster' camp on the Governing Council, available by 31 August monetary policy meeting.

·Signs that markets are starting to catch up with EZA forward view of where rates headed.

© Graham Bishop