FRANKFURT (MNI) – The European Central Bank’s communication
following the mid-month meeting on Thursday remained hawkish but
somewhat more cautious, suggesting that the Governing Council has closed
the door to a rate hike in June.

Since Thursday’s meeting, no Council member has yet used the code
words “strong vigilance” with regard to inflation, which would signal a
rate hike in June. The strong results Germany’s Ifo business confidence
on Tuesday — which spurred market expectation of monetary policy
tightening — is unlikely to change this.

Executive Board member Lorenzo Bini Smaghi on Tuesday sounded a
surprisingly cautious note. “We will do whatever is needed to maintain
inflation low,” he said. But he added: “Of course, it’s a medium-term
objective, so we have to avoid overreaction.”

Bini Smaghi had positioned himself as one of the most hawkish
Council members in recent months. His comments — among the first
policy-relevant remarks since the mid-month meeting — may thus be
particularly revealing.

In a newspaper interview released late Tuesday, Bini Smaghi assured
that the ECB will act again should inflation continue to run ahead of
target. However, he stressed that “inflationary pressures are in part
temporary and due to higher prices for oil and food.”

Again, this may be particularly noteworthy since Bini Smaghi had
previously warned that imported inflation should “no longer be ignored,”
arguing that “a permanent and repeated increase in the prices of
imported products will tend to impact inflation in the advanced
countries, including the euro area.”

This change of tone does not mean that the ECB is about to go soft
on inflation.

Council member Jens Weidmann said Monday that “the rise in
long-term inflation expectations in April have to be taken seriously and
are a sign of a clouding price outlook with an expansive monetary
policy.” Bini Smaghi also warned against relying too much on seemingly
well-anchored market inflation expectations, which may quickly change.

Rather, the more cautious tone may be an attempt to more actively
discourage expectations of a hiking cycle at a time when commodity
prices are volatile, the economic outlook is clouded, and sovereign debt
tensions are reaching fresh peaks.

Commodity prices — largely responsible for Eurozone inflation —
have been extremely volatile of late, but on average more favorable.
President Jean-Claude Trichet welcomed the drop of prices immediately
after the last rate setting meeting. And the bank’s Vice President Vitor
Constancio noted in a recent interview with Market News International
that the drop in commodity prices, and their overall volatility, made it
hard to predict whether the ECB staff inflation forecasts due in June
would show significant upward revisions.

Persistently lower prices may allow the ECB to slow tightening
moves that could otherwise damage peripheral economies.

While it is true that Germany’s miracle recovery appears to remain
well on track, other indicators suggest that the recovery has begun to

Eurozone industrial orders, released Tuesday, fell by a
larger-than-expected 1.8% m/m in March. Coupled with latest flash PMI
readings and results of the Belgian National Bank business confidence
survey, they suggest that activity in the manufacturing sector has

While indicators still point to an ongoing albeit slower recovery,
the Bundesbank warned that a “tension-free environment” is needed to
ensure that the still-positive outlook materializes.

The current environment can hardly be described as free of
tensions. The ECB may have realized that in this environment, more
caution may be warranted than the recent hawkish rhetoric had suggested.

–Frankfurt newsroom +49 69 72 01 42; Email:

[TOPICS: M$$EC$,M$X$$$,MT$$$$,MGX$$$,M$$CR$]