Gearing up for a June hike at the ECB?
Today's decision by the ECB to hold rates was pretty much expected but more interestingly is of course the future path outlined by the ECB. In his introductory statement Trichet gave a brief outline on the recent developments where of course inflation as always is subject to strong vigilance. Inflation in March is estimated to have grown 0.1% from February to 1.9% and as the figure below shows inflation is also edging up in Germany the biggest member country. in terms of the outline on today's decision, Bloomberg has a round-up;
The European Central Bank left interest rates unchanged after seven increases since late 2005, awaiting evidence that inflation will pick up before raising borrowing costs again.
Policy makers meeting in Frankfurt today kept the benchmark refinancing rate at 3.75 percent, as anticipated by all 43 economists in a Bloomberg News survey. The bank will raise the rate to 4 percent in June, a separate survey shows.
ECB President Jean-Claude Trichet, scheduled to speak at 2:30 p.m., may indicate the bank hasn't finished raising rates. He said in an interview published April 2 that a rebound in oil prices and accelerating money-supply growth may warrant ``firm and timely'' action to quell inflation, which has exceeded the ECB's 2 percent target every year since 1999.
``The ECB feels it needs to raise rates but it wants to wait until its own forecasts are confirmed by first-quarter data,'' said Andreas Rees, chief Germany economist at UniCredit Markets & Investment Banking in Munich. ``A June increase is a done deal.''
The ECB says it's concerned that companies will raise prices and wages as economic growth in the 13 nations using the euro shows few signs of slowing from the fastest pace in six years. Economists will scrutinize Trichet's language today for clues on the timing of a further rate increase.
Turning then more specifically to inflation, it has indeed been edging up the recent months to some extent warranting vigilance from the ECB.
Yet, as Trichet outlines in his speech the medium to long term is more important to monetary policy and here Trichet once again invokes the future inflation pressure from lucrative wage deals in for example Germany. Also crude prices should be remebered here and on that note we are likely to see a dip in inflation on an annual basis. Moreover, some reservations needs to be taken on the input of the figure above and consequently the CPI index for Germany and Italy are running well below the HCIP index used as input to the figure above. In Germany the CPI index is stable at 1.6% in both January and February. It does not change much of course but still the underlying fundamentals in Germany's domestic economy do not look as inflationary as many analists seem to argue.
In Summary
In terms of the interest outlook for June I maintain my call that it is not as certain as many may lead you to believe. This underpins a much more bearish outlook for the Eurozone economy than the consensus. Of course inflation and monetary aggregates will be watched closely by the ECB and on that note the chance of a hike seems emminent, particularly if you couple it with today's statement by Trichet. However, I maintain my view voiced in my recent notes that a slowdown in the Eurozone will materialize itself in 2007. Especially, I will be watching Italy and Germany but also of course France which seems to be caught in a slumber well below trend than that of the other big Eurozone countries ever since Q3 06. in Germany for example, we should be watching retail sales which have been falling for two consecutive months in February and January. In the end and although I retain my view that growth will slow considerably in 2007 there are some notable signs that I might be wrong. First of all, the general economic climate seems upbeat at the moment in the Eurozone and if consumer spending stays robust and even perhaps pickup we could be in for an impressive year in 2007 as well although of course a slowdown in the US looms in the immediate horizon. Generally, I must say in hindsigt that I expected the slowdown to come much sooner in the Eurozone than what seems currently to be the case so on that note I might be calling this one wrongly.