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ECB: Preview of meeting on August 7

Wed, Aug 6 2008, 14:55 GMT
by Allan von Mehren

Danske Bank A/S

Overview: We expect the ECB to hold rates unchanged and deliver a quite neutral statement with a repeat of the key policy phrase signalling that rates are appropriate currently. There is a chance of a dovish twist, though, as the ECB may - unwillingly - have to acknowledge rising downside risks to growth on the back of the recent very weak numbers out of Euroland - and in particular Germany. We believe the ECB will be careful not to sound too dovish, though, as it does not want to fuel expectations of rate cuts. However, it may be difficult to control this and if anything we see a chance of slightly lower yields on the back of the statement. Our ECB forecast continues to be for the ECB to be on hold for the foreseeable future, balancing weak growth and high inflation. This is close to current market pricing.

Policy bias: The key phrase in the ECB's statement is 'On the basis of our current assessment, the monetary policy stance following today's decision will contribute to achieving our objective'. We believe this will be repeated in tomorrow's statement and signal a neutral bias for rates in the short-term.

Growth: The growth picture has deteriorated quite markedly over the past two months. The German Ifo has fallen markedly and this has been underpinned by the 'hard' orders data showing the biggest decline (6M AR) since 1993, falling below the levels experienced in 2003 when Germany was in recession. Growth on export markets have also deteriorated - with activity also slowing in Asia and eastern Europe. This will challenge the ECB's view so far of 'continued robust growth in emerging economies'. Even though the ECB has been quite reluctant so far to acknowledge the weakness, the latest batch of data will be difficult to pass without a comment. It may choose to mention that downside risks to growth have risen, which could be interpreted slightly dovish by the market. They will be careful, though, not to sound too dovish in order not to fuel expectations of rate cuts.

Inflation: At 4.1% inflation continues to make new highs and this is worrying the ECB. However, oil prices have levelled off recently, but the ECB is likely find it too early to draw any conclusions from that. It is increasingly worried over rising unit labour costs and the high level of inflation expectations and will keep a hawkish tone on inflation prospects.

Monetary developments: M3 growth and credit growth has moderated recently but this will likely not be enough for ECB to change its medium-term concern over the 'money gap' that has been building up in recent years (M3 growth has not been close to the reference rate of 4½% since 2003). Hence we don't expect any changed signals on this pillar.

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Published on  Wed, Aug 6 2008, 15:03 GMT