No Move at the ECB
Which of course was expected but was that a 'vigilant' Trichet on inflation we heard in the introductory statement? Well, judge for yourselves; the following excerpt does indeed indicate that at least one of the of ECB's objectives today has been to convince markets that inflation still remain much at the forefront of analysis.
Our monetary policy stands ready to counter upside risks to price stability, as required by our mandate. By acting in a firm and timely manner on the basis of our assessment, we will ensure that risks to price stability over the medium term do not materialise and that medium and long-term inflation expectations remain firmly anchored in line with price stability, which is all the more important in the current context. As regards the financial markets, we will continue to pay great attention to developments over the period to come.
In essence, the introductory statement was much like the one we got last time albeit the slight change towards a more hawkish stance on inflation (uh oh, will this mean 1.50 for the EUR/USD?). Given the mandate of the ECB this is warranted and especially in the light of the recent HICP reading which showed that inflation is well above the target at this point in time. However, and just to reiterate the points I have made before you also need to be looking at what others are doing and subsequently what is going on in the rest of the world; particularly in delicate times such as this. Speaking of which (the rest of the world that is) I also noted this remark by Trichet which confirms that the ECB sees a rather rosy future when it comes to general economic fundamentals ...
Available forecasts for 2008 continue to confirm our main scenario of real GDP growing at around trend potential. This scenario is based on the expectation that the global economy will remain resilient, with the slowdown of economic growth in the United States partly offset by the sustained strength of emerging market economies. Continued strong external demand should provide ongoing support to euro area exports and investment. Consumption growth in the euro area should also contribute to economic growth, in line with developments in real disposable income, as continued employment growth provides supportive conditions.
Now, it would be interesting to hear which emerging markets he is talking about specifically here. Clearly, beyond Europe growth remains strong but as I have also noted on several occasions the situation is Eastern Europe far from sustainable and contrary to what people perhaps realize a lot of key indicators for the Eurozone . Obviously the ECB does not set policy for Eastern Europe and far be it from Trichet to actually think about those Euro peggers and all those mortgages/loans denominated in Euros but this is just to say then that the ship is not sailing in open waters anymore and reefs need to be navigated at this point. Also, I think that the general forecast/outlook for growth in the Eurozone seems too optimistic but I also realize that it is difficult for the ECB to say anything different without also actually reacting (i.e. lower rates). As regards to the credit market turmoil the ECB continues to take the position that things need to be watched and appraised which is perfectly as expected. As for the formal forecast and expectation on interest rate decisions I am sticking to my previous view that the ECB will stay put for the rest of the year. The trade-off between growth and inflation is only set to become greater at this point and into the first quarter of 2008. In this light, it seems as if the ECB is content with using the credit market turmoil as an excuse to hold. The market implications of this are difficult to gauge at this point. Growth dynamics are clearly littered with risks to the downside and essentially the indicators almost exclusively point to the downside. As for the EUR/USD it seems to be over crowded and over traded at the moment but it also seems as if the USD has a large part of global liquidity flowing against it at the moment and this pretty much seem to have pushed all kinds of fundamentals to the side for the moment. Of course, fundamentals remain fundamentals but the rubber band is very elastic at the moment so do be careful out there.
Over the weekend I will be preparing a more data intensive note on the Eurozone which will look forward into the last quarters of 2007 (Q3 numbers are out soon).