Surging euro as backdrop for ECB meeting

1 December 2003

FRANKFURT – The European Central Bank is meeting this week against the backdrop of concerns that a surging euro could hit the 12-member eurozone’s long-awaited economic recovery.

Thursday’s meeting of the ECB’s 18-head rate setting council also comes in the wake of moves for a major overhaul of Europe’s Stability and Growth Pact following tensions unleashed in the European Union by the deal hammered out last week allowing Germany and France to side step hefty fines for overshooting the pact’s tough budgetary rules.

But despite concerns expressed by some analysts that the Frankfurt-based ECB’s sharp criticism of the push to ease the stability pact’s strict rules could trigger a rise in rates, most economists do not expect a change in monetary policy this week and believe that rates are hold on for the time being.

Indeed, the notoriously cautious ECB is tipped to keep its benchmark refinancing rate at its current post-war low of two per cent for another six months or more as it weighs up evidence concerning the scale of the economic rebound and the performance of the euro before deciding what its next monetary move is likely to be.

“Current economic growth and inflation do not point to a rate change at present,” said Adolf Rosenstock, European economist with the Japanese investment bank, Nomura. “Rates are on hold for another half a year or more,” he said.

Ahead of Thursday’s meeting, the ECB’s new chief Jean-Claude Trichet is to testify before at the European Union’s economic monetary and economic committee Monday when he is expected to renew criticism of the unravelling of the stability pact and possibly rehearse some of the points he plans to raise at the Thursday press conference following the council’s meeting.

This week’s ECB’s meeting will be the second meeting of the bank’s rate-setting council presided over by Trichet, who launched his tenure as president of the world’s second most important bank just over a month ago with a strong demand for eurozone governments to help keep the lid on inflationary pressures by following strict fiscal discipline.

But like many economists, Rosenstock believes that the surging euro, which is charged the new trading week just short at its all-time of 1.20 dollars, could dictate the course of the currency bloc’s monetary policy over the coming months and the timing of any rates moves.

Apart from hitting the eurozone’s key export machine, a further sharp rise in the euro would result in a tightening of monetary conditions in the currency bloc and as a consequence help to spark renewed speculation of the ECB delivering another rate cut.

At present, analysts are forecasting that the common currency could bound ahead to 1.25 dollars early next year with the euro having already gained about 20 percent against the greenback over the last 12 months.

Powered by a rebound in exports, the eurozone grew by moderate 0.4 percent during the third quarter effectively bringing to an end a long run of economic stagnation and helping to confirm that an economic upswing was taking shape in the currency bloc.

However, inflation has remained more problematic with Trichet complaining at his press conference four weeks ago about the “stickiness” of inflation in the eurozone.

Official data released Friday showed eurozone inflation rate moving further away from the ECB’s two per cent and rising to 2.2 percent in November.

The ECB’s meeting will also coincide with the release of fresh batch of key economic European data this week including unemployment, manufacturing orders, production and retail sales for Europe’s biggest economy, Germany.

Although eurozone economic sentiment surveys have been pointing to growing expectations that a rebound was gaining momentum, economists have been keen to see evidence of the upswing confirmed by the region’s hard economic data.

DPA
Subject: German news