My ECB-ometer shifted from a tightening to an easing bias between late 2007 and early 2008, reflecting weaker economic news and financial market stresses. In early March, as the credit crisis moved towards a climax, it suggested a 40% chance of a rate cut at that month’s ECB meeting. The move has since reversed, however, as markets have normalised and inflation indicators have worsened.

Based on available data, the model suggests a 30% chance of a hike in official rates at next week’s ECB meeting – see chart. This compares with a small probability of a cut last month. The change is due to a combination of strong first-quarter GDP numbers, a further deterioration in both survey- and market-based measures of inflation expectations and a rebound in M3 growth. These developments have offset weakness in survey activity indicators.

It is too soon to expect a reappearance of “vigilance” but next week’s policy statement and press conference could signal a hawkish bias.