04 September 2007

EZA 808 Report: ECB Observer

ECB 6 September Council Preview
EZA STILL SEES 25BP RATE RISE MOST LIKELY OUTCOME ON 6 SEPT, DESPITE AUGUST MARKET TURMOIL, THOUGH POSTPONEMENT TO OCT STILL POSSIBLE.

·No fundamental change in economic and monetary outlook since last month's signal that the ECB was minded to raise rates on 6 September. ·Weaker GDP growth in Q2 but forward indicators point to solid growth around trend in second half of the year and monetary data still signal inflation risks over medium term.                                                                  ·'Flash' estimate suggests 'headline' inflation remained at 1.8% in August, while inflation expectations subside but continuing high energy and commodity prices, the cumulative rise in producer prices and tight labour markets still point to potential inflation risks.                                                ·Financial market turbulence a new factor in ECB's deliberations, which could cause the rate rise to be postponed to October.                               ·More likely, in EZA's view, is a 25 bp rise in 'refi' rate to 4 1/4% this Thursday, with further reassurances that liquidity provision will continue if and when necessary.

© Graham Bishop