11 September 2007

EZA 809 Report: ECB Observer

ECB 6 September Council Post-Meeting Assessment
·No change in ECB's key rates on 6 September, leaving 'refi' rate at 4%, due to heightened ECB concerns about repercussions on short-term credit markets. ·Announced EUR 42 1/4 bn of liquidity injection into overnight market on 6 September and unspecified quantify of support for 3-month money market this week. ·Economic fundamentals, backed by ECB Staff projections, broadly unchanged: growth still set around potential, inflation likely around 2% and money/credit growth still too high. ·Upside risks to price stability and downside to growth remain, although financial market instability could be negative for both. ·Monetary policy stance still on the accommodative side but, given uncertainty due to financial volatility, ECB to monitor closely all developments before drawing further conclusions for monetary policy. Need still to act in a firm and timely manner and to continue to pay great attention to financial market developments over the period to come.

EZA Conclusion: with no fundamental change in the economic and monetary picture since the Governing Council's 2 August teleconference, ECB continues in tightening mode but decides for time being to wait and see whether (with further liquidity injections when necessary) the present turmoil is short-lived. If it so proves, further rate increase to 4 1/4% 'refi' could well come some time around the turn of 2007/08, with prospect of more to come ( to 4 1/2% or 4 3/4%) in 2008 H1. If problems prove more serious, shifting downwards the risks to both growth and inflation, rates could be put on hold indefinitely or, if turmoil becomes crisis, put into reverse.

© Graham Bishop