PARIS (MNI) – With financial markets still riveted by the
Eurozone’s unfolding sovereign debt crisis, ECB President Jean-Claude
Trichet pulled a fast one on Thursday.

He deftly sidestepped the most pressing questions about the debt
crisis and instead dropped a bombshell on inflation with some choice
hawkish comments that caught analysts off guard.

While still expressing optimistism about the ECB’s ability to keep
inflation expectations anchored to its price stability objective,
Trichet nonethelesss hinted at growing concern on the Governing Council.
Inflation risks, while still broadly balanced, could move to the upside,
he warned.

The comments don’t mean the ECB is anywhere near raising interest
rates yet, but they have markets speculating now that a hike could come
sooner than had been previously expected.

Excerpts of analysts comments are below:

FREDERIK DUCROZET, Credit Agricole: Obviously, a very clear shift
to hawkish in the communication. We have long highlighted the risk of
more hawkishness regarding monetary developments…But today’s wording
in the message goes much beyond what we had expected. It’s pretty clear,
not only for today, but that it is clear trend that is expected to
continue in the coming two or three ECB meetings…But the big sentence
today, I think, was that medium term risks could move to the upside.
That’s the big change. If I had to mention one change it would be that
one: medium-term risks could move to the upside.

CARSTEN BRZESKI, ING: Inflation will again be top of mind at the
ECB in 2011…On inflation, The ECB sent a stronger message of
hawkishness. The ECB now sees evidence of “short-term upward pressure on
overall inflation, stemming largely from global commodity prices.” The
phrase “while this has not so far affected our assessment that price
developments will remain in line with price stability over the
policy-relevant horizon, very close monitoring of price development is
warranted,” sends a clear signal that the ECB stands ready to scotch any
pass-through of energy and food prices into the economy. It looks as if
we do not need to wait for Axel Weber to become ECB president to see a
hawkish ECB. The ECB headed by Jean-Claude Trichet can also send hawkish
statements. Of course, all will depend on commodity prices and their
pass-through but with today’s meeting chances of an earlier rather than
later rate hike have increased.

ELGA BARTSCH, Morgan Stanley: ECB sounded more concerned about the
recent rise in inflation than we had expected, saying that its policy
stance was still appropriate and that it has not yet affected its
assessment that price stability will be maintained in the medium term.
This change to key paragraphs of the introductory statement is
noteworthy. At this stage, the ECB expects the inflation overshoot to be
temporary and expects inflation to ease below 2% by year-end. The Bank
is focused on keeping inflation expectations anchored and will closely
monitor them.

MARCO VALLI, UniCredit: Firstly (and most importantly), Trichet
said that price developments, although remaining in line with price
stability, need close monitoring because of evidence of short-term
inflationary pressures stemming mostly from global commodity prices.
While we were expecting something along these lines, it was however
surprising to hear already at this stage that risks to the medium-term
inflation outlook, while still broadly balanced, could move to the
upside. In our view, the more hawkish remarks on the inflation outlook
are far from hinting at an imminent monetary policy shift. Rather, they
should be read as an acknowledgment that the central bank’s projections
for 2011 and 2012 published in December have proved too low (as we have
argued several times) and will probably need to be adjusted at the next
round of forecasts.

KEN WATTRET, BNP Paribas: The level of anxiety at the ECB over the
inflation outlook has stepped up a gear … For markets which have been
focusing primarily recently on funding problems for some governments and
the potential fallout from the sovereign debt crisis, the hawkish tone
of the comments on inflation at the press conference today will have
come as a jolt. The ECB, while not explicitly preparing the ground for a
rate rise imminently, has clearly given a warning shot that if inflation
prospects continue to deteriorate, then they will respond….Our
judgement as things stand is that, while the ECB is justified in
focusing on the risks, for the Eurozone as a whole, these kind of
inflationary problems are unlikely to materialise in a lasting way.
Hence our forecast of tightening only from next year.

JOERG KRAEMER, Commerzbank: President Trichet emphasised the
short-term upside risks to inflation. But inflation rates at just over
2% should not yet prompt the ECB to raise its key rate this year…
After all, the Eurozone is stuck in the deepest crisis since the
introduction of the euro. Moreover, rising unemployment has massively
reduced the upward pressure on wages. Hourly labour costs increased by
only 0.8% recently. Therefore, core inflation looks set to remain at
1.25% in the coming months. We would advance our forecast for the first
ECB rate move from the first quarter of 2012 to this year only if
monthly inflation data and inflation expectations rose noticeably.

JUERGEN MICHELS, Citi: The ECB turned more hawkish on inflation
than we expected. Despite the lack of materialisation of higher
inflation expectations and/or money growth, today’s strong wording
suggests that the ECB may act earlier than we have expected so far.
Therefore, after increasing our inflation forecast last week, we advance
our base case of the first rate hike from 1Q 2012 to 2H 2011, probably
before Mr. Trichet’s term ends on October 31. However, the ECB is likely
to keep the non-standard measures in place for long and probably will
even extend the measures in order to deal with the sovereign debt crisis
once the euro area governments have taken more action, by amending the
EFSF and by introducing additional fiscal tightening.

CEDRIC THELLIER, Natixis: According to our scenario (decrease in
oil prices), headline HICP inflation would decelerate over the medium
term in line with weak core inflation and would undershoot the ECB’s
target (below but close to 2%), averaging 1.7% in 2011 and 1.5% 2012. As
the hump in inflation would be only temporary, it should not be a matter
of concern for the ECB so as to trigger a rate hike…While GDP growth
prospects clearly suggest a long-lasting status quo on the main ECB refi
rate, inflationary risk, as it would decrease over the medium term,
would not be a sufficient reason to hike the rate over 2011 and probably
2012, particularly as long as the banking sector remains fragile at the
global level. Regarding the exit strategy from non-standard measures,
market developments (sovereign debt, the banking sector) may encourage
the ECB to remain cautious and prudent.

ALINE SCHUILING, BNP Paribas Fortis: I think (the press conference)
was more on the hawkish side, with Trichet referring to the rise in
inflation and that it needs to be very closely monitored a phrase that
signals that the ECB is indeed worried about inflation. Although, it
stuck to its general assessment that medium term price stability will be
maintained. But, nevertheless, a bit on the hawkish side. As a matter of
fact, we expected a rate hike for September of this year. In that
respect, we were already a little on the bullish side. That was based
related to the normalization of monetary policy. Rates now are at
exceptionally low levels and, although growth in the Eurozone remains
moderate, policy normalization would be warranted as from 4Q of this
year. Its not so much that policy is going to be tightened, but that it
is going to be normalized. And, that is because the current level of
rates is exceptionally low. And, taking into consideration indeed the
rise in inflation, there is always the risk of second round risks and
rise in the core rate going forward. Of course, that is what the ECB has
signalled.

BEN MAY, Capital Economics: President Trichet reiterated that the
Bank would welcome improvements in the “quality and quantity” of the
European Financial Stability Facility (EFSF). But the Bank’s enthusiasm
for such changes to the bailout facility probably partly reflects
selfish reasons. If the EFSF were to become more flexible and was able
to purchase government bonds or provide temporary liquidity to
struggling governments, the ECB might be able to phase out some of its
own unconventional measures.

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