31 July 2006

EZA 752 Report: ECB Observer

ECB 3 August Council Preview

25 bp RATE RISE EXPECTED THURSDAY, TAKING 'REFI' TO 3%. POSSIBLY 2 MORE HIKES TO 3 1/2% BY END-2006, WITH 3.75% OR EVEN 4% SEEN BY MID-2007

·Not much clearer economic picture this month than last, but balance still tilted to upside inflation risks rather than downside risks to growth.

·'Headline' inflation stuck at 2.5%, with some signs of pass-through of external costs further up the price chain but no sign of major second-round wage/price risks, and inflation expectations recede a little.

·Monthly data show economic activity remaining patchy in Q2 but confidence remains buoyant through to start of Q3.

·Latest monetary data do little to allay medium-term inflation worries.

·Governing Council debate about scale of rate rise likely to come out in favour of 25 bp now but with hints about more to come before long.

© Graham Bishop