EZA 721: Briefing note: Germany

15 January 2006

ECB Council Post-Meeting Assessment, January 2006
Trichet hints at further rate rise in March: monetary policy was still accommodative, rates were historically low and what was in the market 'pretty well captured' the Governing Council's 1 December message. Governing Council would continue to monitor very closely all developments with respect to price stability risks and would act and do what was necessary when it was necessary. GDP growth momentum seen as maintained in 2005Q4 and through into 2006, progressively reaching a rate close to, at, or around, potential. Inflation expected to remain elevated in the short term, with risks remaining on the upside beyond that.

SummaryEZA Conclusion: Trichet gave a pretty clear indication that he feels a consensus can be reached to raise rates again on 2 March, on the back of further healthy GDP growth numbers, inflation persisting above 2% and continuing strong money and credit growth. We would expect this to be a 25 bp rise in the 'refi' rate, unless the feared pass-through and second round effects from energy prices start materialising and inflation expectations start to turn upwards again, in which case the ECB could hoist a 50 bp 'storm signal'. In either eventuality, we expect the rate to be lifted further, to 3%, by the end of the year.

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© Graham Bishop