In the world of central bank watching, certain words and phrases carry particular resonance. In today's policy meeting statement from the European Central Bank (ECB) and at the subsequent post-meeting press conference with its President, the word "vigilance" was strewn about, alongside phrases such as "risks to price stability remain on the upside" and "M3 growth remains robust." The ECB kept its policy refi rate at 2.25% today, but stoked expectations that another rise is coming in March.
"Vigilance" made a reappearance in the text and statements after a two month absence - back in November, the ECB talked of "strong vigilance" and the hike came in December. While the qualifier "strong" was missing today, so too was the previous months' comment about downside risks to growth from low consumer confidence. The comment that "monetary and credit growth remains strong and liquidity ample" was reiterated, as was the point that nominal and real rates are low and the policy stance accommodative. There were also the usual remarks about the need to anchor medium and long-term inflation expectations.
All told, the ECB is confident that its December forecast of continuing economic recovery remains intact. High global oil prices are a major risk, but the bank has not yet seen second round effects and would like to keep it that way.
The forex market hiccupped a bit when Trichet repeated his comment about no series of rate hikes - but we already know the ECB does not anticipate a US Fed-style 25bp-a-month tightening campaign. Once traders have digested the details they will realize that the assumption of 25bp in March and a similar move in June remains apt.
The statements from ECB President Trichet and co. were not as unequivocal as those we saw in the two weeks before the December 1st rate hike - recent Euro-zone economic data haven't been unequivocal either. Although Euro-zone economic sentiment hit a near-five year peak in January, the business climate indicator slipped. German retail sales unexpectedly dropped in December, but manufacturing output, engineering orders, and business sentiment are all on a firm upward trajectory and consumer sentiment is finally starting to recover. French manufacturing appears to be stalling but consumer sentiment there is firm.
Still, the overall impression from this morning is that another round of mostly-solid economic data will lead to another rate hike on March 2nd. To that end, the markets will focus on GDP and sentiment indicators over the next couple of weeks - French Q4 GDP flash estimate on February 10; German and Euro-zone Q4 flash estimates and the German ZEW economic sentiment indicator on February 14; and French business climate index and consumer spending data on February 22. And first up, the flash estimate for January Euro-zone CPI and data on December Euro-zone retail sales, both due out tomorrow.
