EURUSD

"If we have to adopt a tight monetary policy
course in order to reach our goal so be it."

-- European Central Bank Governing Council member
Nicolas Garganas May 15

FRANKFURT (RTRS) - Rarely in recent months have data and commentary
pointed clearly in the same direction but news of the past 24 hours has
certainly encouraged those who believe that the European Central Bank
might need to raise interest rates before it cuts them.

Eurozone data largely sided with the hawks today including the
confirmation of April`s 3.3% HICP and especially flash 1Q GDP. The
Eurozone`s 0.7% q/q gain exceeded last week`s analyst forecasts driven
by stronger than projected growth in France -- where 1Q GDP rose 0.6% --
and a veritable boom in Germany where a 1.5% q/q growth rate shattered
all expectations.

Moreover the ECB`s latest quarterly Survey of Professional
Forecasters (SPF) showed that analysts raised their projections for HICP
inflation in 2008 sharply and in 2009 modestly although they lowered
their expectations for GDP growth both this year and next.

Still the forecasters cut their projection for long-term inflation
back to 1.9% after having raised it to 2.0% in February`s SPF. This is a
positive development in view of the importance the ECB attaches to
keeping inflation expectations firmly anchored.

It is also true that despite the robust first quarter performance
the Eurozone economy is expected to slow in the coming months as it
faces external mounting headwinds

But on balance today`s data painted the picture of a still-buoyant
economy facing serious inflation pressure. As if that message weren`t
enough there were some ECB officials happy to hammer the point home.

Nicolas Garganas soon-to-be-retiring Governor of the Bank of
Greece told the Financial Times Deutschland -- in what will probably be
the first in a round of parting shots -- that there is a "concern that
the influence of the [expected] economic downturn is not strong enough
to push inflation in 2009 under 2% again."

As to what this might imply for policy Garganas as usual pulled no
punches. "To put it very plainly: if we have to adopt a tight monetary
policy course in order to reach our goal so be it -- that is our
obligation" he said.

Perhaps Garganas was merely indulging his own bias and it should
be recalled that he will not be around to push for such moves in the

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future. It is also worth noting that he also called the eurozone`s HICP
spike "temporary" and said that inflation expectations are "in general
still well anchored" thanks to the ECB`s credibility.

That said Garganas may have hit the nail on the head with his
suggestion that a slowdown in growth over the coming quarters need not
mean looser or even stable monetary policy. His apparent support for
raising rates took on added importance with comments from Bundesbank
President Axel Weber another hawk and a Governing Council heavyweight.

"Postponed is not cancelled" Weber said of a potential tightening
move. "I have always emphasized that in view of the currently very
strong upward price pressure we mustn`t let the option of an interest
rate hike out of our sight."

June`s staff forecasts will provide a good basis for discussing
policy options which are aimed at the medium term Weber added.
Revisions to those forecasts would reflect "slightly gloomier" growth
prospects as well as the fact that inflation pressures are up
"considerably" in the last six months and unlikely to be affected much
by the "mild" slowdown he said.

"Against this backdrop there is no room for interest rate cuts"
Weber said.

ECB President Jean-Claude Trichet weighed in as well on Thursday.
Customarily more reserved in his pronouncements he declined -- as on
Monday -- to speculate about staff forecast revisions. That his comments
focused more on the latest growth data rather than inflation simply
reflected the line of questioning of the reporters present.

Still Trichet was notably less hawkish or at least vaguer than
Garganas and Weber. "I will certainly not anticipate [the projections]"
he said. "But again at the moment I`m speaking we are vindicated in
our analysis of a...very significant resilience in the first quarter and
then...some kind of slowing down seems to be likely."

That view was echoed by Yves Mersch who suggested 2Q growth "could
be different" from 1Q.

Executive Board member Lorenzo Bini Smaghi predicted years of
slower U.S. growth but warned that moderation in commodity prices would
take time and said that in periods of uncertainty like the present one
the inflation-fighting priority of the central bank must be clearly
understood. Stimulative monetary or fiscal policies to offset purchasing
power loss due to higher oil prices would be a mistake he said.

ECB Vice President Lucas Papademos said the financial market crisis
was not over and its effects would be felt in the future. While the ECB
scenario calls for moderate but ongoing growth the risks to that
outlook are on the downside he said.

Eurozone central bankers must ensure that elevated inflation does
not lead to second-round effects on wages and the ECB`s priority is to
anchor inflation expectations said Nout Wellink who also expressed
concern over developments in the U.S.

The common tone of ECB commentary thus seems to be one of concern
for the growth outlook against the backdrop of uncertain U.S. prospects
coupled with the need for monetary authorities to secure inflation
expectations in the context of commodity prices seen remaining elevated
over the medium term.

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Garganas and Weber almost seem to have a slightly divergent agenda
that leads them to minimize dangers to growth and the possible impact on
inflation of an economic slowdown while emphasizing threats to price
stability.

It is not clear from the wide cross-section of Council views seen
today that their perspective enjoys broad support provided expectations
stay tame and second-round effects limited.

--Frankfurt Newsroom +49-69-720-142