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14 January 2008

EZA 826 Report: ECB Observer




ECB 10 January Council Post-Meeting Assessment


· As widely foreseen, ECB keeping its key rates on hold on 10 January but, as EZA foresaw in its preview of this meeting , Governing Council further intensifies its tightening bias.

· Further increase in Governing Council concern that temporary inflation 'hump', coupled with further labour market tightening, rising capacity constraints, growing political pressures and continuing strong money and credit growth, could lead to wage/price spiral.

· At the same time, some hints of increased downside risks to growth, stemming from USA.

· New language speaks of pre-emptive action against potential second-round effects induced by (temporary) recent further increases in oil, food and other commodity prices.


EZA Conclusion: Governing Council remains in wait-and-see mode, but with even stronger bias toward tightening. In part this is talking tough to try to forestall inflationary settlements in coming wage rounds but, with money and credit growth still not abating and some Council members again arguing this time for a rate rise, further tightening seems on the cards if, as now seems plausible, financial market tensions subside further in the next few months. EZA's central view therefore remains that the ECB could now be looking to raise the 'refi' rate to 4 1/4% on 7 March but, if financial market fragility persists, this move could be postponed until the summer.



© Graham Bishop

Documents associated with this article

EZA826.pdf


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