06 December 2006

EZA 770 Briefing Note: ECB Observer

ECB 7 December Council Preview

25 bp RISE IN 'REFI' RATE TO 3 1/2% A DONE DEAL FOR THURSDAY, WITH 3.75%-4% SEEN BY MID-2007 AND 4 1/4%-4 1/2% POSSIBLE BY END-YEAR

·With GDP growth on track at around or above potential and money and credit growth still a concern, 25 bp 'refi' rate rise to 3 1/2% widely expected this Thursday.

·Little in data to suggest ECB will be minded to call a halt there. ·External cost pressures remain, with potential domestic cost pressures in the wings.

·Trichet likely to repeat references to low interest rates, dynamic money and credit, ample liquidity and accommodative monetary policy and need to 'monitor very closely'.

·Even if Staff projections show inflation falling below 2% in 2008, EZA's view is still that 3 3/4% is on the cards by mid-2007 and 4 1/4%-4 1/2% possible by end-year. Eurozone advisors continues to believe that further tightening is likely, with the 'refi' rate reaching a neutral rate of 3 3/4%-4% during the first half of 2007 and quite possibly one or two more rate increases - to a mildly restrictive 4 /14% or 41/2% - to come in the second half of the year unless money and credit growth show clear signs of having abated or the dollar goes into free fall. This view remains rather out of line with the sentiment in financial markets. The EURIBOR futures market, which has already fully priced in a 25 bp increase on Thursday is rather less confident than a month ago that the 'refi' rate will reach 3 3/4% in the first half of 2007 and still expects no further increase in the second half of the year.

© Graham Bishop