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11 December 2007

EZA 824 Report: ECB Observer




ECB 6 December Council Post-Meeting Assessment


· As EZA anticipated, ECB maintains (and if anything intensifies) tightening bias while keeping its key rates on hold on 6 December.

· Trichet repeatedly stresses risks that temporary 'hump' in inflation, now expected to be more protracted, might lead to second-round wage/price effects and emphasises ECB's determination to do what ever is necessary to prevent this happening.

· Eurosystem Staff's latest macro projections show inflation averaging 2.5% in 2008, falling back to 1.8% in 2009, on assumption of no second-round effects. Real GDP growth seen as slowing from 2.6% to 2.0% in 2008 and continuing around potential at 2.1% in 2009.

· Continuing strong money and credit growth remain a key concern, with possible distortions due to temporary or special financial market factors still rather down-played.

· Trichet again stresses distinction between setting rates to achieve price stability an responsibility to maintain adequate functioning of money markets

· As last month, monetary policy stands ready to counter upside risks to price stability and the Governing Council will monitor closely all developments and act in a firm and timely manner to ensure risks to price stability do not materialise, as well as pay great attention to financial market developments over the coming weeks.



EZA Conclusion: Governing Council still in wait-and-see mode with, if anything, stronger bias toward tightening. In part this is talking tough to try to forestall inflationary settlements in coming wage rounds but, with some Council members arguing this time for a rate rise and a rate cut not being considered, further tightening seems on the cards if financial market tensions subside. EZA's central view therefore remains that the 'refi' rate will be raised to 4 1/4% in the summer of 2008 (unless second-round effects threaten to emerge sooner), with the ECB continuing to supply (and withdraw) liquidity as needed to maintain a degree of order at the short end of the money markets.



© Graham Bishop

Documents associated with this article

EZA824.pdf


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