The ECB Holds (for now)


UPDATE: I have added a few clarifying sentences and links below because I realized that my points were not very clearly stated.

The ECB today chose to keep interest rates unchanged at 3.25% but we all know the narrative of extreme vigilance and as such we can probably expect another raise going into 2007 (that would be in december).

(From Trichet's introductory statement)

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. The information that has become available since our last meeting has further underpinned the reasoning behind our decision to increase interest rates in October. It has also confirmed that strong vigilance remains of the essence so as to ensure that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. With the key ECB interest rates at still low levels, money and credit growth dynamic, and liquidity ample by all plausible measures, our monetary policy continues to be accommodative. If our assumptions and baseline scenario continue to be confirmed, it will remain warranted to further withdraw monetary accommodation. Indeed, acting in a firm and timely manner remains essential to ensuring price stability over the medium term. As emphasised on previous occasions, this is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area.


To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook remaining clearly on the upside. Given the ongoing marked dynamism of monetary growth in an environment of ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term. It is essential that inflation expectations remain firmly anchored at levels consistent with price stability. If our assumptions and baseline scenario continue to be confirmed, it will remain warranted to further withdraw monetary accommodation.

The economic outlook do indeed seem positive and we have good news coming out of the october data ... manufacturing output is up and inflation is down. However, as we see the ECB remains vigilant; how near are we to deflation in 2007 in key member countries if 2007 becomes a nasty year and the US slowdown and Chinese imports do not help? What do we have then going into 2007?

- Consumer demand is 'lacking' in the sense that the trajectory is not nearly following the same upbeat path as other economic indicators (particularly in Germany).

- How export driven is the European growth at this point and what is the outlook? This is obviously a tricky question since it all depends on the Chinese question and the nature of the Chinese growth. Investment is a main driver here but what about consumer consumption? Hell; The Economist says one thing and Roach from Morgan Stanley another invoking among other things the lack of consumer demand. In any case the lack of consumer demand presents an important missing link in the narrative of the sustainable recovery I think.

- The fiscal situation is sure to levy deflationary pressures in Italy and Germany ...

I would argue that the ECB is playing with fire going into 2007 ...