ECB Will Hold Rates Steady Based on Recent Economic Data

Wednesday, September 03, 2008

Comfortably cushioned by recent economic data the European Central Bank (ECB) will most likely leave its leading overnight interest rate steady at 4.25% at its governing council meeting on Thursday. ECB president Jean-Claude Trichet can be expected to point to improvements in both inflation data and money supply M3. According to Eurostat inflation has leveled off slightly to 3.8% in August, after an annual CPI of 4% a month earlier. A year earlier inflation had just reached the ECB'S upper target level of 2%.Money supply M3, supposedly the other policy target of the ECB, has continued its retreat below the 10% mark and stood at 9.3% in August (July: 9.5%.) The ECB has a formal M3 growth target of 4.5% which it has overstepped since the introduction of the common European fiat currency in 2001.
Expect Trichet to keep the ECB's stance that inflation will moderate in the medium and long term. This is not backed up by producer price data, though. Latest PPI figures from July show an annual increase of 9% (June 8%) in the category "total industry excluding construction." Eurostat does not publish an overall PPI.While there had come some hawkish tones from two ECB council members last week, rapidly worsening economic indicators will guarantee steady rates too.
Recession in Q2 2008
Eurostat published a first estimate for Q2 2008 GDP data that show a decline of minus 0.2% MOM. Expect the PIGS (Portugal, Italy, Greece, Spain) to take the lead in a further economic contraction.
Add in further proof from a continuing decline in retail sales, which fell 0.4% MOM in July and combine it with gas prices that did not decline equally with crude oil. Europeans have no spare cash that could boost the economy. A good part, though not as many people as in the USA, are saddled with the same problem: Rising market rates for mortgages and the threat of negative home equity have yet to grow into a financial disaster rivalling the chaos in the USA.
Looking at forex markets I don't expect American Federal Reserve Notes to rise further after the announcement of the ECB. The 10% correction against the Euro is IMHO merely technical. But never forget that the whole world wants to get rid of FRNs. 


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