10 April 2007

EZA 785 Report: ECB Observer

ECB 12 April Council Preview

NO RATE RISE EXPECTED THURSDAY BUT 4% SEEN FOR JUNE AND 4 1/4%-4 1/2% BY END OF YEAR

·As signalled by Trichet last month, no rate move expected this Thursday but case building for further increases to come.

·Strong GDP growth in 2006 Q4 confirmed and set to remain above trend, labour market tightening continues and labour cost increases last year now revised up.

·Inflation numbers currently flattered by favourable base effects but these will fade from May on, core inflation now rising and further signs of pass-through of external costs.

·Monetary growth still accelerating, liquidity overhang continues to widen and bank lending to private sector, although slowing, remains rapid.

·EZA's sees next 'refi' rate rise, to 4%, coming in June, and markets have started to catch up with EZA's long-held view that 4 1/4%-4 1/2% likely before end of 2007.

© Graham Bishop