30 June 2009

EZA 902 Report: ECB Observer

ECB 2 July Council Preview

NO RATE CUT SEEN THURSDAY OR FOR SEVERAL MONTHS TO COME, BUT NOW MORE LIKELY THAT EVENTUAL NEXT MOVE WILL BE UP RATHER THAN DOWN

· Confirmation that marked deepening of recession in Q1 was driven mainly by further collapse in domestic demand, led by sharp reductions in capital spending and stock levels.

· Mixed picture of economic activity at start of Q2, but some preliminary indications that recession may have begun to bottom out during the course of this quarter.

· 'Headline' inflation confirmed at zero but 'core' inflation edges only slightly down, while labour costs and external cost pressures continue to mount.

· Monetary analysis awaits Tuesday's release of May money and credit data.

· ECB likely to remain in wait-and-see mode at least until September, as special measures feed through, but next rate move, still some months off, more likely to be up than down.

Barring any unforeseen developments in the money and credit data to be published on Tuesday, the Governing Council is likely to keep all three of its key policy rates on hold at least until September. At that point, it will be able to reconsider its position in the light of the ECB Staff's revised macroeconomic projections, Q2 GDP data and indicators of economic and monetary developments over the summer months. As things stand, it seems increasingly likely that the next rate move, still several months off, will be up rather than down.
 

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