ECB Refinancing Rate Left at 4.0%

May 8, 2008

As universally thought, the European Governing Council, a 21-person committee comprised of six directors plus the 15 central bank presidents from the members of the European Monetary Union, did not change its benchmark rate structure this month. The last rate change, a rise of 25 bps, was implemented in early June 2007. The size of the committee is important to the dynamics of the decision-making process. It takes significant new information to produce a new policy plan. The current plan is one of wait-and-see to assess the extensive and multi-varied impacts of the global financial market turbulence upon trends in economic activity, money and credit growth, and most importantly, inflation. A press conference led by President Trichet begins at 12:30 GMT. Investors look for greater acknowledgment of a weaker growth prognosis and a hinted willingness to consider an interest rate cut later this year. I think Trichet will not be as dovish as markets assume. Too much uncertainty persists to send such a signal, which could fan elevated inflation expectations. At least some officials will want to see inflation clearly receding first. Unlike the Bank of England, the ECB operates by consensus building, which is hard to do when so many policymakers are involved. Such a consensus will be easier to reach once inflation is falling. That, in part, depends on commodity prices over which the ECB has no control.

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