15 June 2010

EZA 954 Report: ECB 10 June Council Post-Meeting Assessment

·        Q1 growth of 0.2%, dampened by adverse weather but rebound seen in the spring and moderate but uneven growth expected to continue in second half of 2010.

·        'Headline' inflation rises to 1.6% in May and slight further increases not ruled out, with upward pressures on commodity prices, but domestic price pressures remain.

·        Staff GDP growth projections revised up for 2010 (to 1.0%) but down for 2011 (to 1.2%), with inflation for both years revised up but remaining comfortably below 2%.

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

·        Underlying pace of monetary expansion remains moderate, with growth of loans to households strengthening further but downward trend in loans to non-bank financial corporations continues.

·        Monetary policy will do all that is necessary to maintain price stability, ECB will continue to monitor all developments very closely, and the policy stance and the provision of liquidity will be adjusted as appropriate.

·        ECB to retain a fixed-rate full-allotment procedure for its regular 3-month LTROs through Q3 and points out €40 bn of sterilised bond purchases in the first four weeks of its Securities Markets Programme.

EZA Conclusion: On current ECB thinking, monetary policy tightening and even a resumption of the exit strategy seem to be off the agenda for the foreseeable future and rate increases before the spring of 2011 are almost certainly not currently envisaged. However, external cost pressures, exacerbated by euro weakness, and any serious indications that they are feeding through into the domestic price chain, could force the Governing Council's hand sooner, and before the eurozone economy and financial system are safely out of the woods. We therefore do not fully rule out some tightening around the turn of this year.

Please see attached our regular post-meeting analysis from John Arrowsmith. Simply open the attached pdf and read the full report onscreen or click & print.

For further information please contact:

John Arrowsmith

+44 (0) 7720 591 726

john.arrowsmith@eurozoneadvisors.com

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