11 June 2007

EZA 795 Report: ECB Observer

ECB 6 June Council Post-Meeting Assessment

·As signalled by Trichet a month ago, ECB raised key rates by 25 bp on 6 June, taking 'refi rate to 4%.

·Monetary policy still seen as on the accommodative side and acting in a firm and timely manner warranted but less urgent note struck as monitor closely replaces 'strong vigilance' and interest rates no longer described as 'moderate'.

·Policy tightening now showing some restraining effects on monetary data but still vigorous money and credit growth and ample liquidity require very careful monitoring.

·Staff macro projections revise GDP growth up slightly for 2007 and down slightly for 2008, while inflation revised from 1.8% to 2.0% for 2007 but unchanged at 2.0% for 2008.

·Increasing pricing power in some sectors now added to list of inflation risks.

·No convening of Governing Council in Frankfurt currently foreseen for August.

EZA Conclusion: A 25 bp increase, taking the 'refi' rate to 4 1/4%, can be expected after the summer break, in September or October. Favourable growth outlook and upside inflation risks, with rising capacity utilisation and tightening labour markets, together with still stubborn expansion of money and credit, strengthen the 'activist' case for at least one further increase to a slightly restrictive 4 1/2% around the turn of the year, as long foretold by EZA and as markets are now starting to price in as a possibility.

© Graham Bishop