07 July 2008

EZA 852 Report: ECB Observer

ECB 3 July Council Post-Meeting Assessment


· As widely predicted, Governing Council raised its key interest rates by 25 bp on 3 July, taking its 'refi' minimum bid rate to 4 1/2%.

· Object of the decision was to prevent broadly-based second-round effects and to counteract the increasing risks to price stability over the medium term.

· ECB sees post-hike policy stance as contributing to the achievement of its price-stability objective, while Governing Council will continue to monitor very closely all developments.

· With 'headline' inflation having reached worrying levels in May and June, further increase in upside risks have, Trichet emphasises very strong concern about possibility of broad-based second-round effects and strong determination to keep expectations anchored.

· Taken together, strong real GDP growth in Q1 and rather weak Q2 growth are seen as in line with ECB's expectation of moderate ongoing growth, but downside risks still prevail.

· Underlying rate of money and credit growth remains strong, with availability of bank credit as yet not significantly affected by ongoing tensions in financial markets.



EZA Conclusion: The Governing Council has reverted to wait-and-see mode, hoping that this signalling of its determination to act when necessary will be heeded by wage- and price-setters, thus holding the line over the next few months until inflation starts to subside. If this strategy proves inadequate, as it well could, we would expect a further rate increase before the end of 2008.

© EZA