EZA 843 Report: ECB Observer

12 May 2008

ECB 8 May Council Post-Meeting Assessment

· As foreseen by EZA for several months and latterly almost universally expected, the ECB kept its key interest rates unchanged on 08 April, maintaining its neutral policy stance with a hint of a bias towards tightening;

· No significant change in ECB's view of continuing moderate real GDP growth, despite signs of complacency about recent monthly indicators of activity, which suggests possibly little downward revision of growth prospects in forthcoming June Staff macro projections;

· Downplaying of April slowdown of inflation from 3.6% to 3.3% and protracted period of high inflation rates still expected before moderating gradually later in the year, with some recognition now that inflation expectations might be starting to move upwards.

· Money and credit growth still seen as vigorous but hints that granting of new credit lines may be drying up.

EZA Conclusion: as we saw a month ago, the Governing Council remains in neutral, with no indication that an early cut in rates is on the cards. Barring accidents on the growth or inflation fronts, we still see rates staying on hold well into the second half of 2008 and possibly through to the beginning of 2009, and we do not rule out an increase in the ECB's main refinancing rate if market tensions subside and short-term market rates return to more normal levels.

© EZA