01 August 2007

EZA 803 Report:

ECB 2 August Council Preview

NO RATE RISE LIKELY 2 AUG BUT 25 BP HIKE TO 4.25% SEEN FOR 6 SEPT OR 4 OCT. MARKETS NOW RESILING FROM EZA VIEW OF 4.5 % END-2007, 4.75% BY MID-2008

• No rate change likely on 2 August but, as Trichet hinted in past 2 months, 25 bp hike to 4 1/4% to be expected on 6 September or, increasingly likely, on 4 October.

• Latest economic and monetary data show mixed picture but further slight tilt in balance towards upside inflation risks/lesser downside growth risks over near to medium term.

• Latest monthly indicators suggest activity revived after poor start to 2007 Q2, while economic confidence waned a little but still comparatively buoyant at start of Q3.

• 'Flash' inflation estimate suggests weakening 'headline' rate, from 1.9% to 1.8% in July but with rising external costs still feeding through into domestic industry's output prices, demand still robust and labour markets continuing to tighten, price pressures accumulate.

• Growth of broad money and private sector credit accelerate further and liquidity overhang goes on widening, borrowing even though household sector borrowing still slows.

• Financial markets resile from EZA's long-held view that the 'refi' rate likely to reach 4 1/2% around end-2007/early 2008, quite likely even reaching 4 3/4% in first half of 2008.

© Graham Bishop