07 May 2008

EZA 841 Report: ECB Observer

ECB 8 May Council Preview


NO RATE CHANGE FORESEEN FOR 8 MAY: RATE CUT POSSIBLE SEPT-DEC, BUT RATE RISE BY END-2008 STILL NOT RULED OUT.

· Easing of 'headline' inflation rate from 3.6% to 3.3% in April was mainly due to favourable year-ago statistical effects: risks of second-round wage-price spiral remain, with continuing external cost pressures, domestic pass-through to prices, and rising labour costs.

· Several signs that economic activity may have picked up slightly in early 2008, but financial, manufacturing and consumer confidence and retail spending are further dented.

· Additional evidence that past official rate hikes, financial market stress and euro strength, are pushing monetary aggregates downwards, but money and credit growth and liquidity overhang still uncomfortably high.

· ECB seen staying in neutral mode, with tightening bias, monitoring how wage negotiations and developments in financial markets, the US economy and global growth play out, with official rates likely to remain on hold well into second half of 2008.

· Odds on rate cut by year-end shorten but, if market turmoil ceases, rate rise still possible.

© EZA