29 August 2006

EZA 755 Report: ECB Observer

ECB 31 August Council Preview

NO RISE IN ECB RATES SEEN THURSDAY, BUT 25 bp STILL EXPECTED OCTOBER OR NOVEMBER AND 25 bp MORE AROUND END OF YEAR

·Limited information since last meeting suggests robust growth plus slight easing of inflation/cost pressures in short term, leaving balance of risks, tilted to inflation, little changed.

·Monetary data mostly moderate further but may not allay medium-term inflation worries.

·ECB Staff's expected revised growth and inflation projections not likely to deflect ECB from path of progressive policy tightening.

·No rate increase expected Thursday but 25 bp hike to 3 1/4%, likely October or possibly November, depending on language of Thursday's statement.

·3 1/2% 'refi' rate still seen by EZA as likely around turn of year, with probable pause around 3 3/4% in mid-2007 but further rise, to 4 1/4%, by end-2007 not ruled out.

© Graham Bishop