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09 June 2008

EZA 848 Report: ECB Observer




ECB 5 June Council Post-Meeting Assessment

· As foreseen by EZA for several months and latterly almost universally expected, the ECB kept its key interest rates unchanged on 5 June, but Trichet switches to hawkish tone, speaking of 'heightened alertness' and of possible 25 bp rate rise as early as 3 July;

· Balance of argument swings sharply within Governing Council, with some members arguing for immediate rate rise, some for later rise and some for continuing wait-and-see.

· Noting 3.6% June 'flash' inflation estimate, upside risks to price stability seen as having increased further, while economic fundamentals of eurozone still seen as sound.

· June Eurosystem Staff macro projections show GDP growth revised up from 1.7% to 1.8% for 2008 on back of strong 0.8% Q1 growth and down from 1.8% to 1.5% in 2009, but quarterly growth path showing trough reached in 2008 and upturn in 2009.

· Inflation revised up, from 2.9% to 3.4% for 2008 and up from 2.1% to 2.4% in 2009.

· Downplaying of April slowdown of inflation from 3.6% to 3.3% and protracted period of high inflation rates still expected before moderating gradually later in the year, with some recognition now that inflation expectations might be starting to move upwards.

· Money and credit growth still seen as vigorous and now 'thorough assessment' suggests no significant impact of financial turmoil on bank lending so far.



EZA Conclusion: Following this sudden hardening of sentiment within the Governing Council, in EZA's view a 25 bp rise within the next three months is a near certainty, with the odds very much in favour of it taking place on 3 July, but the doubters might be able to delay this for a further month, while the expression 'strong vigilance' might be re-introduced to signal this one month in advance.



© EZA

Documents associated with this article

EZA848.pdf


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