31 October 2005

EZA 707: Briefing Note: ECB Observer

ECB 3 November Council Preview
FURTHER TILT TOWARDS INFLATION CONCERNS BUT RATES SEEN ON HOLD WITH 'STRONG VIGILANCE' UNTIL Q2 2006, WHEN 2 HIKES LIKELY no change in 'strong vigilance' stance expected at 3 November ECB meeting: EZA still sees rates held until 2006 Q2, when two 25 bp hikes likely. tentative signs of activity strengthening in Q3 and confidence still improves. September 'headline' inflation now shown as 2.6%, only edging back to 2.5% in October but 'core' inflation still very subdued and domestic cost and price pressures largely contained. Yet more signs of rising inflation expectations and further acceleration of money/liquidity/credit growth tilt balance of argument a little further still towards risks to price stability once demand is seen to have strengthened. Futures market moves closer to EZA's view but is probably jumping the gun with a February rise and too relaxed on August timing of a second rise.

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© Graham Bishop