05 March 2007

EZA 780 Report: ECB Observer

ECB 8 March Council Preview

25 bp HIKE IN 'REFI' RATE TO 3 3/4% A RACING CERT FOR THURSDAY, WITH 4% SEEN BY EZA FOR MID-2007 AND 4 1/4%-4 1/2% BY END OF YEAR

·Latest month's data back ECB's case for further tightening, making 25 bp rise in 'refi' rate, to 3 3/4%, as signalled by Trichet a month ago, a racing certainty.

·Unexpectedly strong GDP growth registered in 2006 Q4, set to continue above trend this year and next, with continued labour market tightening.

·Inflation numbers flattered by favourable base effects for a few more months, but these fade later this year, and there are further signs of pass-through of external costs.

·Rapid monetary growth continues and private sector credit demand, especially by corporations, remains strong.

·EZA's holds to its view that more rate hikes to come, taking 'refi' rate to 4 1/4%-4 1/2% by end-year, but markets price in a peak at 4% this summer.

© Graham Bishop