EZA 537 - ECB-Monetary

06 June 2003

European Central Bank's Analysis after Cuts in Rates
The European Central Bank's analysis in the aftermath of its decision to cut official short rates to the historical low of 2% yesterday shows important shifts of emphasis. The stress on keeping inflation below but close to 2% in President Wim Duisenberg's statement bolsters our view that, despite his repeated protestations, there is high internal sensitivity to the potential for weak economic growth and a rising currency to bring lower consumer prices.

The ECB is anxious that any discussion of 'deflation' could be self-fulfiling - Angst over a consumption halt à la 1930s that is unfounded, in our view. But euro area HICP at or around 1%y/y over the next months is probable. Thus, the ECB analysis leaves open the possibility of further cuts in rates, but not until after the summer.

It is significant that in a news conference of around 5,000 words, the word 'demand' appeared only once - and then in the context of out-of-area demand picking up. Despite this, the ECB analysis now shows much more sensitivity to economic growth than previously. This may be needed; German private sector loan growth has turned negative now; French is running at just 1.6%y/y. This is the second of a two part report.

Summary Asset Conclusions: ECB has opened door to more rate cuts after summer since its central scenario continues to be a further euro/dollar rise

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© Graham Bishop