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09 July 2007

EZA 801 Briefing Note:




ECB 5 July Council Post-Meeting Assessment


·As widely expected, no change in ECB's key rates on 5 July, leaving 'refi' rate at 4%.

·Monetary policy stance unchanged, with policy still seen as on the accommodative side, Governing Council continuing to monitor closely all developments and acting in a firm and timely manner remains warranted.

·Policy tightening showing some compositional effects on monetary data but money and credit growth still vigorous and liquidity ample, which requires very careful monitoring.

·Upside risks to price stability and downside risks to growth remain over medium to longer term, with heightened concern about capacity constraints and rising protectionist pressures.

·Trichet still foresees no need to convene physical meeting of Governing Council in August and does not seek to change market expectations of a rate rise in September or October.

EZA Conclusion: The odds appear to have shortened on a possible deferral of the next rate hike (to 4 1/4%) from September to October in order to secure a consensus in September, on the back of more data and fresh forecasts, to signal with the words 'strong' vigilance' a rate rise the following month. A 25 bp increase, taking the 'refi' rate to 4 1/4%, can be expected after the summer break, in September or October. Still favourable underlying growth outlook and upside inflation risks, with rising capacity utilisation and tightening labour markets, together with still stubborn expansion of money and credit, strengthen the 'activist' case for at least one further increase to a slightly restrictive 4 1/2% around the turn of the year (as long foretold by EZA and as markets are now largely pricing in), with an additional 25 bp rise to 4 3/4% a distinct possibility.



© Graham Bishop

Documents associated with this article

EZA801.pdf


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