The Coming Week in Europe: ECB Press Conference May Highlight Bank's Rate Bias

Also, if Schroeder's party in Germany fares poorly in elections Sunday, it could hurt his chances of passing his financial reform package.
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The wait for higher interest rates in Europe starts now.

Even though nobody expects the

European Central Bank

to change rates at its meeting next week, everyone will be hanging on President

Wim Duisenberg

, who will offer his two (euro) cents on monetary policy for the first time since mid-July. Back then, Duisenberg put a mild spook into about-to-be-vacationing traders by noting a tightening bias was "creeping" into the ECB's considerations.

Sure, Duisenberg's words weren't beaten into the planet's collective consciousness as deeply as

Federal Reserve

Chairman

Alan Greenspan's

"irrational exuberance"

quip, but it was arguably his most powerful sound bite since 11 countries dropped their marks, escudos and francs in favor of a common currency this past January.

His cleverly timed comment propped up a flagging euro, which was flirting dangerously close to parity with the dollar at the time. On Friday, the euro was back at $1.06. Duisenberg gave the new currency just enough breathing room for stronger data to show Europe's economic recovery was taking hold.

The fact that the continent's economy does seem to be rebounding means that during Thursday's press conference, Duisenberg will likely have to answer the question of whether the ECB has now adopted a tightening bias, rather than merely crawling toward one.

Even if the bank does opt for such a bias, many observers don't think a rate hike is imminent.

"Business sentiment is probably still too fragile for the ECB to begin tightening policy this year," says Catherine Lee, an economist for

Greenwich NatWest

in London. "As the upturn in growth takes hold,

they'll be able to take back this year's rate cut."

No move this Thursday, perhaps, but the key point remains that euro-area rates are likely to go in only one direction at this point.

The coming week will also present data that are sure to be scrutinized by the ECB and the market alike. On Wednesday morning, German

industrial production

for July will provide insight into Europe's largest economy, although the central bankers will have to wait until Friday to check out Spain's IP for the month.

Figures for second-quarter

gross domestic product

for France and Germany will be released on Tuesday and Thursday, respectively. Both reports are likely to show the low point of growth for the year in the eurozone's top two economies.

In the equity markets, financial issues will likely hold interest for investors amid speculation of further mergers and consolidation in the sector. On Friday, Britain's third largest bank

National Westminster

(NW)

said it was in discussions to buy life insurance and pensions provider

Legal & General Group

. While in Frankfurt,

Commerzbank's

(CRZBY)

chairman announced the bank would create a regional investment bank with its European partners.

The European aerospace industry could also provide some excitement next week, after Germany's leading business daily

Handelsblatt

reported Friday the German government was actively promoting a merger between

Airbus

partners

Dasa

, owned by

DaimlerChrysler

(DCX)

, and France's

Aerospatiale Matra

.

On the political scene, regional elections on Sunday in Germany could make Chancellor Gerhard Schroeder's chance of passing his financial reform package more difficult if his center-left SPD party fares poorly.

With a slew of local elections spread out over the next six months, stubbornly high unemployment and slumping poll ratings, Schroeder will probably be one of the last people pleased when the ECB does finally pull the trigger.