The EMU sentiment indicators have fallen to historic lows. The ECB’sresolute monetary action is largely intended to restore confidence.The increased yield spreads within the euro area are an example ofcurrently malfunctioning markets or market distortions.

The concerted interest rate cut is welcome as a strong signal to avert panic. With risks to the financial system still lurking, inflationary dangers waning and economic and labor market developments most probably poor, the ECB is likely to remain in the driving seat and reduce key rates to 3 %.

Although we have adjusted our growth forecasts downwards for this year and next, we still see the economy picking up in the course of 2009, buoyed by the recent drop in the oil price and the depreciation of the euro. As the economy is bottoming out, there will be no ECB rate cut.

The European economy is on a downward slide – but to what extentand for how long? Striking the right balance between growth risks on the one hand, and inflationary risks on the other remains a difficult matter for the ECB, which is why it is likely to continue straight ahead for the foreseeable future.

With downward revisions of economic growth forecasts and upward adjustments to inflation estimates, the situation is becoming increasingly difficult for the ECB. A further tightening of the interest-rate screw looks unlikely.

The EMU economy proved surprisingly resilient in the first quarter, but will have a rude awakening as early as the second quarter. The now inverted yield curve is another ingredient in the cocktail of problems for the economy going forward.

Sentiment and capacity utilization are heading south, the jobless rate is no longer falling. Nonetheless, the drop in the inflation rate will not suffice for the ECB for now. We do not expect a key rate cut until September at the earliest. Narrowing interest rate gaps to the US are likely to weaken the euro.

Although the ECB is resisting a rate cut given the current high level of inflation, we think that a loosening of monetary policy will be unavoidable due to the economic risks.

It’s official: the euro-area economy weakened considerably at the end of 2007. All growth drivers are likely to have been affected. This slower pace is set to continue for the first half of the year.

The latest sentiment indicators do not paint a rosy picture, but do not give too bleak an outlook either. Even if the increase in GDP in 2008 is almost one percentage point lower than last year, the growth drivers will remain intact, which will be more evident again in 2009.

Growth momentum more than doubled in the third quarter, but is not set to remain so buoyant. We expect key rates to remain unchanged at 4 %. In our view, the ECB’s tightening bias is also designed to avert debate/speculation about rate cuts.

The gathering clouds on the economic horizon have arrived at arelatively opportune point in time, with the EMU economy in robust shape. For now an ECB rate hike is not possible, later no longer necessary. The euro is poised to increase further to 1.50USD/EUR initially before falling back towards 1.40.

The financial crisis is taking its toll on sentiment. The banks have tightened their conditions for business and housing loans. In spite of this, the real economy is likely to escape virtually unscathed. The euro is unlikely to soar further from its current high level in the longer term.

While the real euro area economy will not escape the US real estate crisis and turbulence on the financial markets unscathed, it should prove robust. Given that a considerable degree of uncertainty will continue to surround the overall outlook, the ECB is likely to remain on hold.

The EMU economic cycle is likely to have peaked. This, combined with the risk of further turbulence on the financial markets sparked by the US, should hold the ECB back from pushing keyrates above 4.25%.

Despite the remarkable decline in unemployment, we see no signs of any serious wage pressure. Nevertheless, the ECB is likely to tighten rates again in September. The tightening steps implemented so far should curb lending growth further.

The Q1 figures have laid the foundation for economic growth of 2.7 % this year. In view of both this and the most recent ECB press conference, we believe that key interest rates have not yet peaked. Nevertheless, the rise in yields should come to a halt.

We think it a little premature to raise our growth forecast of 2.5 % for this year, but we do see increasing upside risks. In contrast to the previous tightening cycle, this time the euro is helping the ECB to do its work. However, key interest rates may top 4 %.

The EMU economy is recording relatively balanced growth. The fact that private sector lending is gradually losing momentum reflects the impact of monetary policy. Although the ECB has clearly kept its options open with respect to a further rate hike, we do not think that this scenario will materialize.

The surprisingly strong increase in GDP in the fourth quarter of 2006 has lifted the starting point for this year, which is why we have increased our growth forecast to 2.4 %. Although the ECB is “barking” ahead of key wage negotiations, it is unlikely to “bite”with a key rate of more than 3.75 %.