09 October 2007

EZA 812 Report: ECB Observer

ECB 4 October Council Post-Meeting Assessment



· As expected, ECB's key rates kept on hold on 4 October, leaving 'refi' rate at 4%, due to continuing uncertainty about repercussions of financial market turmoil.

· ECB sticks with main scenario based on ECB Staff's macro projections, with growth expected to be sustained through 2007 H2 and continuing around potential in 2008, but increased uncertainties due to financial market volatility and re-pricing of risks.

· Inflation expected to remain "significantly above" 2% during 2007 Q4 and in early 2008 before moderating, and upside risks to price stability remain.

· Continuing strong money and credit growth remain a concern, even though August data believed partly distorted by portfolio shifts due to temporary/special market factors.

· Governing Council will continue to monitor closely all developments before drawing further conclusions for monetary policy and will still act in a firm and timely manner and pay great attention to financial market developments over the period to come but reference to accommodative monetary policy stance replaced by monetary policy stands ready to counter upside risks to price stability.



EZA Conclusion: with no fundamental change in the economic and monetary picture since the 6 September meeting, Governing Council remains in wait-and-see mode with a bias toward tightening. If short-term money market rates return soon to more normal levels without having caused serious damage to the economic outlook, ECB would see policy as on the accommodative side once more and again look to raise official rates. This could well be in December, when GDP growth data for 2007 Q3 and the Eurosystem Staff's next macroeconomic projections will be available. If, by then, financial market problems prove more deep-seated and pervasive, impairing the growth outlook, rates could be kept on hold into the New Year and even put into reverse during the first half of 2008.

© Graham Bishop