09 January 2007

EZA 773 Briefing Paper: ECB Observer

ECB 11 January Council Preview

NO RATE RISE EXPECTED THURSDAY. NEXT MOVE, TO 3 3/4%, POSSIBLY 8 FEB. BUT MORE LIKELY 8 MAR., WITH 4% SEEN BY MID- AND 4 1/4%-4 1/2% BY END-2007

Balance of economic and monetary analysis remains tilted towards upside risks to inflation rather than downside risks to growth. But rate rise unlikely this month, so soon after December's hike and less urgent tone of Trichet's December press statement. External cost pressures remain, with potential domestic cost pressures in the wings and dynamic money and credit growth a continuing cause for concern. With uncertainties surrounding current growth picture and impact of German VAT increase some Governing Council members likely to urge proceeding with caution, so EZA sees next increase, to 3 3/4%, as more likely at 8 March than 8 February meeting. Markets now share EZA's view that 4% likely around mid-year but not yet our view that 4 1/4%-4 1/2% is possible by end-year.

© Graham Bishop