EZA 811 Report: ECB Observer

02 October 2007

ECB 4 October Council Preview


NO RATE MOVE EXPECTED 4 OCTOBER: ECB's WAIT-AND-SEE STANCE SET TO CONTINUE BUT, IF MARKET RATES NORMALISE, 4 1/4% 'REFI' LIKELY END-2007.

· With monetary stance still "accommodative" but market interest rates remaining abnormally elevated, ECB likely to remain in wait-and-see mode.

· Downside risks to growth have increased but upside risks to price stability remain.

· If market turmoil abates and risks to growth subside, as ECB believes, further rise in ECB's 'refi' rate, to 4 1/4%, likely around turn of year, with 4 1/2% possible by mid-2008.

· If turbulence persists beyond end-2007 and growth (and inflation risk) fades, a rate cut next spring would become a growing possibility.

© Graham Bishop