NEWS / Foreign Exchange

ECB: Another month of wait and see

As expected the ECB??™s Governing Council left key policy ratesunchanged at the meeting today. At the following press conference PresidentTrichet stuck to the fairly hawkish line from last month. Aside from this, Trichetappeared to tread water at today??™s Q&A session, basically indicating that theGoverning Council still holds a wait-and-see stance. Thus the overallconclusion is still that the Council needs more information before deciding onfuture policy ?–that is whether the upside risks to inflation need more tightening. The Councilis therefore still at its second highest level of alert to raise rates(monitoring prices very closely).

 In detail the statement revealed littlenews. However, we noted three - what we would call minor - changes in the preparedstatement:

 1. The Council stressed that theinformation becoming available since the last meeting fully confirms the upside risks to pricestability. Last month the Council did not use the word fully.

 2. The Council also noted the divergencebetween 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 doubtthe signal from confidence indicators right now. Thus this is also a fairlyhawkish point to note given that markets have probably fully focused on softdata and disregarded hard data.

 3. Finally, the Council believes thatcredit data should be interpreted with caution. Even though credit growth isstill running strong, it may be due to many corporations adopting new loans tocope with the ramifications of the credit crisis, and due to householdsadopting new loans as well.

 Aside from that, we detected little newsfrom Trichet. In particular Trichet avoided sending any new signals on theeuro, and he did not sound overly stressed by the pick up in market inflationexpectations. The outlook for ECB is fairly uncertain. We believe the -economic window- (economic growth and inflation) forfurther tightening will remain half-open over the coming 6 months but thengradually close. The ?“financialwindow-(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, andthe economic outlook stabilises the ECB will tighten policy a little further. Onbalance we continue to expect 25bp tightening in March and June 2008.