02 September 2008

EZA 858 Report: ECB Observer

ECB 4 September Council Preview

NO RATE CHANGE EXPECTED THURSDAY. RATE RISE BY END-YEAR NOT RULED OUT

BUT MORE LIKELY KEPT ON HOLD UNTIL 1/4% CUT IN EARLY 2009

· Inflation drifts lower, to 3.8%, and inflation expectations subside, amid further signs of a downturn in economic activity and weakening business and consumer confidence.

· Some increase seen in downside risks to growth and 'headline' inflation rate seems likely to decline gradually over the next six months but upside risks to inflation remain.

· July's rise in official interest rates and continuing abnormally high short-term market rates allow ECB time to debate further the extent to which weaker economic activity will ease inflation pressures.

· Growth of monetary aggregates continues to slow but remains vigorous and increase in liquidity overhang continues.

· ECB expected to remain alert while keeping rates on hold for some months to come, with rate rise around end-2008 not ruled out but rate cut more likely early next year.

© EZA