05 August 2007

EZA 804 Report: ECB Observer

ECB 2 August Council Post-Meeting Assessment
As predicted, no change in ECB's key rates on 2 August, leaving 'refi' rate at 4%. In brief introductory remarks at unexpectedly-summoned 'press briefing', Trichet signals likely rate rise next month, saying strong vigilance is of the essence. Sustained economic growth seen as continuing through 2007 Q2 and rising oil prices, emerging capacity constraints and potential for stronger wage and cost dynamics imply upside inflation risks over the medium term. Strong underlying monetary growth confirms such upside risks over medium/longer term. Trichet implies 25 bp rate rise likely September but no hints about rates further ahead. Financial stability moving up the list of monetary policy considerations.

EZA Conclusion: Decision to hoist 'strong vigilance' signal after 'virtual' meeting of Governing Council (and to hold unscheduled 'press briefing') considerably lessens odds on the next rate rise (to expected 4 1/4%) being held over from September to October. EZA still believes continuing resilient demand and stubborn money and credit growth, one and quite possibly two further hikes, to 4 3/4% are likely within the coming 12 months. Concerns about market volatility and potential instability are likely to reinforce the hands of the more cautious members of the Governing Council, arguing for a slowing of the pace of tightening from the average of 25 bp every 3 months seen since December 2005, as rates approach their probable peak.

© Graham Bishop