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ECB: A hike in June − and then what?
Thu, May 10 2007, 14:49 GMT
by Niels-Henrik Bjørn
As expected, the ECB’s governing council left key interest rates unchanged at today’s meeting. However, at the press conference, ECB president, Mr Jean-Claude Trichet, signalled that a June rate hike of 25bp is very possible, bringing the policy rate up to 4.0%.
In the prepared statement, Mr Trichet did not voice many changes compared to his statement of last month. However, two changes are worth noting:
- Firstly, Mr Trichet added an extra upside risk to price stability - namely that high capacity utilisation is a risk to price stability
- Secondly, the paragraph on liquidity was much changed, which probably served to downplay recent accelerating M3 figures. We interpret Mr Trichet as cautiously saying that overall credit and liquidity conditions are very slowly beginning to moderate, and that M3 figures are not always a precise measure of underlying credit growth. However, the conclusion is still the same: Liquidity is ample and a clear risk to price stability going forward.
With the first factor drawing the ECB in a more hawkish direction, the second is probably a little dovish in nature. Overall, the stance and communication is fairly unchanged from the last couple of months.
Looking beyond June, the waters look to set to become fairly muddy. Given that credit growth is easing and export growth is no longer so strong, the ECB may choose to remain sidelined for some time to see the lagged effects (on the housing market, for example) of the tightening that has already taken place. On the other hand, the ECB will probably be facing inflation forecasts of 2.0% next year, and prospects of growth will still be above trend. With tightening labour markets, upward risks to wage inflation will persist. Finally, it will be easier to continue policy tightening rather than pause, which may not be that long anyway.
We expect the negative effects of the German VAT hike to fade over the coming months. Also, we believe that global industry has bottomed out, which will lend more support to exports in H2 07. Thus, we continue to expect the ECB to tighten policy to 4.25% in September, or possibly a little later.
Published on Thu, May 10 2007, 14:51 GMT
Danske Bank
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