07 August 2006

EZA 753 Report: ECB Observer

ECB Council Post-Meeting Assessment, August 2006.

As expected, ECB raises key rates by 25 bp on 3 August, taking 'refi' rate to 3%. Trichet signals further increases likely in coming months but probably not at next meeting: interest rates still 'low' and monetary policy still 'accommodative' but 'monitor very closely' replaces last month's 'strong vigilance'.. Recent geopolitical tensions and suspension of Doha Round mentioned in context of risks to growth, while risks to price stability 'have augmented'. Trichet downplays policy role in slowdown seen in latest money and credit numbers.

EZA Conclusion: Although downside risks to growth may have increased somewhat, provided evidence continues to accumulate that the economic recovery is being sustained in line with the ECB's baseline scenario, further rate increases are to be expected as the ECB proceeds with its 'progressive withdrawal of monetary accommodation. A case could be made for the next move to come at the 'September' meeting on 31 August, on the back of Q2 GDP data and the Staff's new macroeconomic projections, given expected continuing strong inflation and monetary growth. More likely, however, is a 25 bp rise in October, as a way of reconciling those Governing Council members who wish to proceed cautiously and those who are more impatient. We continue to expect a further increase, to 3 1/2%, around the end of the year, with a pause in the tightening at 3 3/4% or 4% by mid-2007.

© Graham Bishop