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ECB: Another month of wait and see
Thu, Nov 8 2007, 15:12 GMT
by Niels-Henrik Bjørn
As expected the ECB’s Governing Council left key policy rates
unchanged at the meeting today. At the following press conference President
Trichet stuck to the fairly hawkish line from last month. Aside from this, Trichet
appeared to tread water at today’s Q&A session, basically indicating that the
Governing Council still holds a wait-and-see stance. Thus the overall
conclusion is still that the Council needs more information before deciding on
future policy
that is whether the upside risks to inflation need more tightening. The Council
is therefore still at its second highest level of alert to raise rates
(monitoring prices very closely).
In detail the statement revealed little
news. However, we noted three - what we would call minor - changes in the prepared
statement:
1. The Council stressed that the
information becoming available since the last meeting fully confirms the upside risks to price
stability. Last month the Council did not use the word fully.
2. The Council also noted the divergence
between hard and soft data. While confidence indicators have dropped recently,
hard data have been fairly strong. In line with our view, the Council seems to doubt
the signal from confidence indicators right now. Thus this is also a fairly
hawkish point to note given that markets have probably fully focused on soft
data and disregarded hard data.
3. Finally, the Council believes that
credit data should be interpreted with caution. Even though credit growth is
still running strong, it may be due to many corporations adopting new loans to
cope with the ramifications of the credit crisis, and due to households
adopting new loans as well.
Aside from that, we detected little news
from Trichet. In particular Trichet avoided sending any new signals on the
euro, and he did not sound overly stressed by the pick up in market inflation
expectations. The outlook for ECB is fairly uncertain. We believe the -economic window- (economic growth and inflation) for
further tightening will remain half-open over the coming 6 months but then
gradually close. The financial
window-
(money and credit market risk aversion, Fed policy and the euro) is, however,
still closed and may remain so for some time. If calm returns to markets, and
the economic outlook stabilises the ECB will tighten policy a little further. On
balance we continue to expect 25bp tightening in March and June 2008.
Published on Thu, Nov 8 2007, 15:19 GMT
Danske Bank
| Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com
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