First Interesting ECB Meeting In Years

Thursday, April 06, 2006

For the first time in more than two and a half years today's ECB council meeting will become truly interesting. Contrary to the past there has been no clear indication of the intended action of the ECB governors.
Walking the tightrope between the necessity to hike rates to finally curb sprawling money supply and the problem that higher rates might further diminish Europe's chances for a return to the path of solid growth it is open what the ECB will do. In my opinion the ECB would be well advised to ratchet up rates quicker although this could put the dollar - the currency currently seen worldwide as "too big to fail" - under severe stress now that China openly favours a reduction of dollar debt papers. So it remains to be seen how strict the ECB will follow its single mandate of price stability.
Monetary indicators point towards another 25 basis point tightening to 2.75%.
M3 growth accelerated to 8% (7.6%) in February and inflation is at 2.2% (2.3%) above the target rate of 2%.
A look at producer prices promises more inflation to come: The PPI rose 0.5% (0.4%) in February month-on-month (MOM) and the annual rate is now 5.4%.
Economic news prove my impression of a problematic situation. Retail sales declined 0.2% in the Eurozone month-on-month and rose a paltry 1.0% YOY. Industrial orders were down even more in the Eurozone: They fell 5.9% MOM in January but were still up 9.7% YOY, confirming an upturn in the machinery sector.
Reading the markets it looks like the ECB will hike the leading overnight rate by 25 basis points: The US dollar fell to 1.23 Euros in late Wednesday trading. Gold showed that geopolitical/economic worries continue to dominate investors minds. June gold futures rallied to a new high above $594, making the yellow metal again the best performing major currency.

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