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ECB Gives Few Signs For Its Next Move Following Today's Hike

Proving their dedication to transparency, the European Central Bank delivered on their amplified concerns surrounding inflation follow the June policy meeting by delivering a 25-basis point hike to the benchmark lending rate today. However, the market was clearly prepared for such an outcome as seen in a lack of reaction to the hike to 4.25 percent. Instead, market participants, European business owners and consmers were moving onto the commentary ECB President Jean Claude Trichet would deliver 45 minutes after the announcement. There were three general scenarios most speculators were prepared for: commentary that suggested this would be the last hike in the policy group's extended hawkish regime; rhetoric that is more or less on par with what was seen in June that would hint at another near-term hike; or a nuetral tone with inflation concerns dominating but with no specific timeline for the next policy change. Looking over the language in the prepared statement and answers to questions, it was clear the ECB would persue the third option.

The highlight throughout the public address was once again concerns over inflation. Trichet noted risks to price pressures were "clearly to the upside" and had increased since their last statement. The group projected a gradual moderation in inflation through 2009, but also that key readings would hold above 2.0 percent for "some time." More prominent in his remarks this time around (in comparison to statements earlier in this year) were concerns in second round effects. Particularly, the ECB expressed cocnern that wages would rise with higher living costs and further support price pressures beyond the medium term. Trichet specifically noted that indexation of wages to inflation must end.

Outside of the otherwise boiler plate inflation laguage, there was a cautiously bearish outlook for economic growth. Noting that doneside risk to growth were prevailing, the ECB suggested there was high uncertainty when growth forecasts were measured. What's more, Trichet stated that for policy decisions going forward, the bank will be evaluating first and second quarter growth together as an expected deceleration in growth through the June period would be a natural reaction to the surprising strength to the first three months of the year.  Adding an additional caveat to the future, there were also warnings that market tensions could hurt the real economy going forward.

Altogether, this language and tone in the ECB's prepared statement and Trichet's answers provided little fodder for speculating when the next move would be. However, Trichet's suggestion that the central bank has "no bias" for rates going forward seems to be far more neutral than many traders were expecting. Furthermore, the vow to take first and second quarter growth readings together no doubt means they will hold off on aggressively extinguishing inflation until second quarter growth numbers are released. - John Kicklighter, Currency Analyst for