10 August 2008

EZA 856 Report: ECB Observer

ECB 7 August Council Post-Meeting Assessment

· As predicted, ECB's Governing Council kept its key interest rates unchanged on 7 August, leaving its 'refi' minimum bid rate to 4 1/4%.

· ECB sees latest economic data as further underpinning last month's decision to raise rates and as confirming that inflation is likely to remain high for a protracted period.

· Although it expects real GDP growth to be weak in both Q2 and Q3, due in part to global slowdown and dampening effect of high oil and food prices, ECB still sees this as the trough, but downside risks to growth remain.

· Upside risks to price stability have increased further and Trichet expresses new worries about slowing productivity growth and rising labour costs, saying avoidance of second-round price and wage effects is crucial.

· Strong underlying pace of monetary growth is underpinned by still high growth of bank lending to the private sector, with the expansion of credit to non-financial corporations remaining robust.

· Governing Council "has no bias" but emphasises its strong determination to keep inflation expectations anchored in line with price stability objective, seeing the current monetary policy stance as contributing to this, and will continue to monitor all developments very closely.



EZA Conclusion: The Governing Council maintains its wait-and-see stance adopted after last month's rate rise in the hope that, having shown that it will act when necessary, wage- and price-setters will heed the warning and inflation expectations will be contained over the next few months until inflation starts to subside. Despite "no bias", a rate cut still seems highly unlikely this year, whereas a further rise before the end of 2008 can not yet be ruled out.

© EZA