08 September 2008

EZA 859 Report: ECB Observer

ECB 4 September Council Post-Meeting Assessment

· ECB's Governing Council kept its key interest rates unchanged on 4 September, as expected, leaving its 'refi' minimum bid rate at 4 1/4%.

· ECB sees latest economic data as confirming that inflation is likely to remain high for a protracted period and upside risks to price stability over the medium-term prevail.

· Weaker economic activity in both Q2 and Q3 still seen as a trough, with a gradual recovery thereafter, but downside risks to growth remain.

· ECB's latest projections revise GDP growth down, from 1.8% to 1.4% and from 1.5% to 1.2% for 2008 and 2009 respectively, and inflation up, from 3.4% to 3.5% and from 2.4% to 2.6%.

· Increasing concern about rising labour costs, indirect effects of high energy and food costs and the risk that second-round effects become entrenched and more widespread.

· Growth of broad money and credit aggregates now shows signs of moderating but strong underlying pace of monetary expansion points to continued risks to price stability.

· Governing Council "has no bias", sees current monetary stance as contributing to achievement of its price stability objective but would always do what was necessary to deliver price stability and would continue to monitor all developments very closely.

EZA Conclusion: The Governing Council remains in wait-and-see mode, believing that the July increase in official interest rate, continuing high short-term market rates and the present softening of the real economy, will be sufficient to hold the line over the next few months, when the 'headline' inflation rate should reflect the moderating impact of favourable year-ago statistical base effects. Despite "no bias", a rate cut still seems highly unlikely this year, whereas a further rise by the end of 2008 can not yet be ruled out.

© EZA