12 November 2008

EZA 870 Report: ECB Observer

ECB 6 November Council Post-Meeting Assessment

Trichet stops short of signalling further rate cut in December, but not ruled out

· ECB cuts key interest rates by 50 bp on 6 November, just 4 weeks after the co-ordinated 50 bp cut of 8 October, and 75 bp was also discussed.

· Inflation now seen as continuing to decline to a level consistent with price stability during the course of 2009.

· Momentum of economic activity has weakened significantly, a number of downside risks to activity have materialised and Trichet hints at large downward revisions next month to Staff's GDP projections.

· Upside risks to price stability have diminished further, with wage and cost pressures expected to moderate in the face of protracted impact of financial turmoil on demand and of recent strong falls in commodity prices, but have not completely disappeared.

· Money and credit growth still strong, although continuing to slow.

· Governing Council will "continue to keep expectations firmly anchored" and to "monitor very closely all developments".

EZA Conclusion: Trichet keeps the door open for a possible further cut in rates on 4 December but makes it plain that this is not a foregone conclusion. Debate at next month's meeting is likely to focus on the strategy - the scale and frequency of rate cuts - for further monetary easing in the face of economic and financial uncertainties. The more activist members of the Governing Council, who looked for 75 bp this time, are likely to push for at least a further 25 bp, if not 50 bp, on the back of sharp downward revisions to the Staff's growth and inflation projections. The gradualists, who may have preferred 25 bp this time or postponement to December, might again seek a month or two's deferral. In EZA's view, the virtue of getting ahead of the curve with another 50 bp cut next month is likely to swing the argument, presentationally dressed in language warning about the continuing upside risks to price stability that second-round wage and price effects might pose. This would bring the ECB's 'refi' rate down to 2 3/4%, leaving scope for perhaps a further 75 bp of cuts over the following six months as inflation fades.
 

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