05 August 2008

EZA 855 Report: ECB Observer

ECB 7 August Council Preview


NO RATE CHANGE EXPECTED THURSDAY. RATE RISE BY END-YEAR NOT RULED OUT BUT MORE LIKELY TO KEPT ON HOLD UNTIL 1/4% CUT IN FIRST HALF OF 2009

· Inflation hits record 4.1% and inflation expectations remain elevated, amid further signs of sharp slowing of economic activity and weakening business and consumer confidence.

· Upside risks to inflation and downside risks to growth still acute but last month's rise in official interest rates and continuing abnormally high short-term market rates allow ECB time to debate further the extent to which growth down-turn will ease inflation pressures.

· Growth of monetary aggregates continues to slow but remains vigorous.

· ECB expected to remain alert while keeping rates on hold for some months to come, with rate rise by end-year not ruled out but rate cut more likely in first half of next year.

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