EZA 658: ECB Council Preview February 2005

02 February 2005

No rate change expected; likely on hold - against market expectation - to end 2005/early 2006
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SummaryAgain no change in interest rates in prospect at next Governing Council meeting Latest data suggest balance of debate tilting back slightly towards inflation concerns, reinforced by continuing strong money growth but..... demand and cost pressures remain subdued and inflation expectations ease. More hawkish tone from Trichet likely but..... expect rates to stay on hold barring US$ crash/oil hike until growth returns close to trent - late 2005 or early 2006 We anticipate no change in the policy stance but rather more hawkish language to be used in the President's prepared statement to the Press on Thursday. Furthermore, with inflation set to subside and economic activity recovering we remain of the view that interest rates will stay on hold for several more quarters until, perhaps in the early part of 2006, there is sufficient evidence that growth has returned to trend. In this view, we remain outside the consensus position of most financial market participants and analysts. The Euribor futures market is now pricing in a rate increase of 25 basis points by early autumn 2005 - a little further out than indicated a month ago - with a further 25 bp rise towards the end of the first quarter of 2006.

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