EZA 698: Briefing Note

06 September 2005

ECB Council Post-Meeting Assessment, September 2005
As expected, Governing Council still judges existing policy stance 'appropriate', but now sees 'particular vigilance' as warranted. Staff shade 2005 and 2006 growth projections down 'slightly' but 'considerable' upward revision of inflation projections. Further tilt in balance of argument towards upside risks to price stability further ahead from potential oil-price feed-through, money/credit/liquidity growth, and possible increases in administered prices/indirect taxes. ECB still seems comfortable with actual 'headline' inflation above 2% for time being and still expects activity to strengthen in 2005 H2. The 'Fazio Affair' could cause problems for ECB.

SummaryEZA Conclusion: Expect rates to remain on hold through to late Q2 2006, when 1 or 2 successive 25 bp rate hikes likely if GDP growth is returning to trend. But if further commodity price rises start to trigger second-round inflation effects, earlier rate rise of 50 bp probable. This view contrasts with EURIBOR futures market, where a 25 bp hike by end-Q3 2006, priced in at the start of last week, was cut by more than half during the course of the week.

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© Graham Bishop