The ECB holds ...

... but hints to a further raise in August.

(from the FT)

'The European Central Bank on Thursday raised the likelihood that it would lift interest rates at its next meeting.

While the bank kept eurozone interest rates on hold at 2.75 per cent, as expected,the market latched on to comments from Jean-Claude Trichet, ECB president, that “strong vigilance” was needed to counter inflationary pressures in the eurozone.

Mr Trichet’s language was seen as a strong pointer towards a 25 basis points rate rise at the bank’s August 3 meeting.

The market also noted the fact that the ECB would meet in person on August 3, rather than the telephone-based conference call previously planned.'

The neutral rate of inflation is what we need to watch out for apparently ...

'The ECB estimates that the neutral level of real rates is between 2 and 3 per cent, suggesting that nominal rates will not be normalised until they reach at least 4 per cent, according to Capital Economics.

Core inflation and wage growth remains muted, with little sign so far of significant second-round effects from the high oil prices that are supporting headline measures of inflation.'

... and then we have the 'increased support for the single currency.' The question obviously is here just how much 'support' (an appreciation of the Euro) the members can actually contain; think Spain's current account deficit and Germany's exports.

'The bank’s governing council will also be keeping one eye on the strength of the euro, which has recovered from $1.184 against the dollar to $1.2730 since the turn of the year. A pick-up in the speed of monetary tightening would likely provide further support to the single currency.'

Obviously the ECB is driven by a joint move by central banks to scoop up excessive liquidity but just how much can the Eurozone economy take here? Ah well, in the end there are perhaps also very valid arguments for the current ECB strategy but the trade-offs are large either way.