By Nicholas Hastings
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--The European Central Bank may well confirm market expectations Thursday that interest rates will rise again later this year, but with the euro-zone economy showing clear signs of being past its peak, don't expect the ECB to be any more aggressive than that.
"The general picture of an economy that has moved past the peak in the business cycle is likely to become increasingly evident," said Mitul Kotecha, chief currency strategist with Calyon Corporate and Investment Bank in London.
"There has been little indication that the central bank is prepared to step up the pace of its interest rate hikes and the likely timing for the next move is the meeting Oct. 5, with a further one in December leaving interest rates at 3.5% by year-end," he said.
A reminder of the need for ECB vigilance came earlier this week with the euro zone's latest M3 money-supply data for August.
Growth of the money aggregate slowed to 7.8% in July from 8.5% in June and came in well below the 8.3% that had been forecast.
But analysts pointed out, this still remains uncomfortably above the 4.5% reference rate targeted by the ECB.
Benedikt Germanier, currency strategist with UBS in Zuerich, also pointed to the acceleration in private sector lending that will ensure that the ECB remains wary of inflation pressures. As a result, he said, there had been little change in the Euribor curve in response to the data - indicating that rate expectations remained very much as they were before.
"While we believe that the ECB will keep rates on hold this Thursday, as is priced by rate markets, there is a chance of a 25-basis-point hike given strong gross domestic product data and still high business confidence," Germanier said.
Tuesday, the latest German GfK consumer confidence survey will only have helped to boost the impression that further rate hikes are justified.
The index rose to 8.6 in August from 8.5 in July, taking it up to the highest level since November 2001.
Sylvain Broyer, a euro-zone economist with IXIS Corporate and Investment Bank in Paris, reckons that the rise in confidence is due to unchanged income expectations and a strong willingness to make purchases ahead of an increase in German value-added tax early next year.
Nevertheless, Broyer doesn't expect this improvement to continue.
"We expect a decrease in the GfK consumer confidence index in the months to come," he said, pointing to the peak in the business cycle expectations of German consumers that is consistent with the decline in German business confidence indicators last week.
"The signal is now clear. The first half of 2007 won't be as buoyant as the first half of 2006," Broyer said, noting that after 2.2% this year, the German economy is likely to expand by just 1.3% next year.
Friday, the latest purchasing managers' index for the euro zone as a whole is also expected to reflect the downside risks, with the main activity measure falling to 57.4 in August from 57.7 in July.
But how much this data will influence the ECB is questionable. If anything, there is talk that the ECB will raise both its growth and inflation forecasts for the region this week - making it that much more likely that ECB President Jean-Claude Trichet signals the need for further "normalization" of interest rates above their current 3% level.
"With inflation above the 2% mark, the ECB will continue to focus on price pressures while the moderation of business surveys is unlikely to create much concern for the ECB as yet," said Hans Redeker, global head of foreign-exchange strategy at BNP Paribas in London.
Martin van Vliet, a euro-zone economist for ING Financial Markets in Amsterdam, is also expecting the ECB to suggest that it is ready to tighten policy further during the press conference.
"Although a rate hike at the monetary policy meeting on Thursday seems unlikely, we do expect hints at the news conference that the next step in the tightening cycle is likely to come at the October meeting," van Vliet said.
Given that the ECB is unlikely to hold any surprises for the euro, the single currency continues to trade largely on the dollar's movements, even though it was able to hit a new record high of Y150.13 earlier Wednesday.
By 0645 GMT, the euro was trading steady at $1.2830 from $1.2831 late Tuesday in New York, according to EBS.
It is also up at Y149.91 from Y149.62 after falling back from its highs.
The dollar managed to make it up to Y116.84 from Y116.61 on end-of-month Japanese importer buying, shrugging off late Tuesday's minutes of the last U.S. Federal Reserve rate meeting, which proved more dovish than the market expected and increased expectations that U.S. interest rates may already be at their peak.
Bloomberg TNI FRX POV
Reuters USD/DJ
Telerate 1066 or 1074
Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 15 years. Apart from his written commentary and analysis, he also appears on CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: [email protected])
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(END) Dow Jones Newswires
August 30, 2006 03:15 ET (07:15 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.
