10 May 2010

EZA 947 Report: ECB Observer

·        ECB keeps key rates unchanged at 6 May policy meeting, leaving 'refi' rate at 1% for the twelfth month in a row, current intention being to keep 3-month Euribor very close to 1%.

·        Economic recovery continues, adverse weather dampening Q1 growth but some evidence of strengthening since and moderate growth seen for 2010, with risks broadly balanced.

·        'Headline' inflation, at 1.5% in April, greater than earlier expected due to higher energy, and short-term prices, but domestic price pressure expected to remain contained and inflation to remain moderate over the medium-term.

·        Near-term, inflation risks on the upside but still broadly balanced over the medium term.

·        Underlying pace of monetary expansion still seen as moderate, while downward trend in loans to non-bank financial corporations is possibly coming to an end.

·        Anchoring of inflation expectations is still of the essence, ECB will do all that is necessary to maintain price stability and will continue to monitor all developments very closely.

·        Hints that Greek crisis and inadequate fiscal retrenchment by others could complicate monetary policy decision-making, but slow-down of the exit from special liquidity provision and even possible ECB purchases of government bonds not explicitly ruled out.

EZA Conclusion: Given the subdued outlook for growth and price stability and the continuing expectation of moderate inflation, the ECB is currently not considering even a first step towards the 'normalisation' of official interest rates but increased concern about upside inflation risks from external price pressures suggests a heightened alertness to any signs of any significant further rise in inflation expectations, so we no longer rule out a rise in official interest rates before end-2010. But any decision to start monetary tightening would be complicated further by the Greek crisis, the bond market turmoil and contagion risks, as well as the inadequate fiscal consolidation programmes of a number of eurozone governments.

Please see the attached the regular post-meeting analysis from John Arrowsmith to simply read onscreen or print from the attached pdf and read at your convenience

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