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ECB: Preview of meeting April 12

Thu, Apr 12 2007, 07:14 GMT
by Niels-Henrik Bjørn

Danske Bank A/S

It is widely believed that the ECB will leave rates on hold this month. Feeble speculation about a possible rate hike in May is not well founded, and Trichet is likely to wait until the May meeting to signal a rate hike to take place at the June meeting. We expect a broadly unchanged, and hawkish, statement from Trichet. Market pricing looks fair for the first time in many months, as short rates have risen strongly.

Overview

Last month Trichet turned a bit less hawkish, as he said that: “Monetary policy continues to be on the accommodative side, with the key ECB interest rates moderate”. Before the rate rise in March, Trichet said that: “Our monetary policy remains accommodative, with the key ECB interest rates still at low levels”. This time around nothing much has happened that is likely to change the statement from last month. Data have been mixed, but importantly, business confidence did not fall last month, and ECB members have generally been on the hawkish side. Trichet will probably not give clear guidance about the future course of policy, but in the Q&A session he could easily say that market expectations for the end of Q2 look reasonable. The market is currently pricing an 80-90% probability of a June rate hike.

Economic data

Danske Bank’s ECB monitor has slipped significantly over the past two months. The monitor suggests that the ECB is still in hike territory, but closing in on neutral territory. Four factors are key in moving the monitor towards the neutral zone:

1. The plunge in German retail sales following the VAT hike. However, it seems as if it will not have major ramifications for business confidence, and underlying real incomes bode well for a rebound soon. Thus this factor may not play much of a role going forward.
2. Export growth has slowed somewhat over the past couple of months, but given our expectations of a bounce in the global industrial cycle, this slowing should prove temporary.
3. Inflation has moderated, but the ECB has told us that the inflation outlook is still not satisfactory.
4. The rate rise in March has dampened the need for further hiking. All in all, the data still suggest that the ECB should raise rates, although the picture is no longer crystal clear. Importantly, we believe that some of the factors pushing our ECB monitor towards the neutral zone will be temporary. Thus, we now expect the ECB to hike rates not only in June, but also in H2-2007.

ECB comments

ECB members have generally continued to be on the hawkish side, and continue to underline the strength of the European economy. Members therefore argue that risks to price stability are still on the upside, indicating that further tightening will be needed. However, some members also suggest that, given the current outlook, policy need not become restrictive, thus questioning tightening beyond 4.0%.

Selected ECB member comments

Trichet at the previous press conference:

• “After today’s increase, given the favourable economic environment, our monetary policy continues to be on the accommodative side, with the key ECB interest rates moderate, money and credit growth vigorous, and liquidity in the euro area ample by all plausible measures. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted.”
• “... the risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. At longer horizons, risks lie mainly on the downside. The main risks relate to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures and concerns about possible disorderly developments owing to global imbalances.”
• “...the outlook for price developments remains, in the Governing Council’s view, subject to upside risks. These relate to the possibility of renewed oil price increases and additional increases in administered prices and indirect taxes beyond those announced and decided thus far. More fundamentally, stronger than currently expected wage developments would pose significant upward risks to price stability, not least in view of the favourable momentum of real GDP growth observed over the past few quarters. It is therefore crucial that the social partners continue to meet their responsibilities. In this context, wage agreements should take into account price competitiveness positions, the still high level of unemployment in many economies, as well as productivity developments. The Governing Council will monitor the upcoming wage negotiations in the euro area countries very carefully.”

Comments from other ECB members:

• Bini-Smaghi, Mar.11: “Rates must follow the evolution of the economic cycle if we want to contain inflationary pressures and ensure lasting growth.”
• Weber, Mar. 13: “We are still in an environment where we are talking about further withdrawing the monetary policy stimulus to the economy, even when this is smaller than it was.” “Whether monetary policy must go past that point cannot be wholly ruled out. I do not think the issue of restrictive policy is relevant against the background of the 2008 projection horizon."
• Gaspari, Mar. 26: “I'm not saying that inflation expectations are completely benign, but inflation is obviously under control ...” “...the majority of us are of the same opinion...”
• Garganas, Mar.27: “I would not say that interest rates have reached a level that could be described as a peak.” “If we assess that inflation risks are on the upside and jeopardise price stability, we will act to ensure price stability. There's nothing sacrosanct about the level of interest rates.”
• Liebscher, Apr. 4: “Overall, we absolutely have the impression that this is broadly-based and robust growth, very much to be seen as positive by euro area standards, and so the outlook for this year and also for next year is obviously a much better one than we assessed half a year ago.”

• Download full ECB: Preview of meeting April 12

Published on  Thu, Apr 12 2007, 07:17 GMT

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