ECB president Trichet signaled that rates are on hold until after June. So much for the inflation fighter. The market has been expecting a rate rise to match the higher inflation in the EU. It is going to have to wait. The currency markets reacted immediately with the upward trend in the Euro reversed. Trichet stated that the ECB never "pre-committed" to change. He also did not use the words "strong vigilance" instead he stated that the bank is monitoring inflation "very closely".
After getting ahead of the Fed, with a rate rise, the ECB seems to be more closely following the view of the Fed that commodity prices may be peaking and that the increase in food and energy prices will slow in the second half of the year. If there is a slowdown, there will be less need to raise rates and place downward pressure on European economies.
Core Euro-region inflation is still only 1.3% which is very much in check, but the PPI is hovering around 6% and headline inflation is above the target rate. Given the often loose link between rate changes and inflation, it is hard to fix what should be the right interest rate, but the ECB has other things to worry about. A strong Euro hurts exports and any slowdown will carry over to debt issues.
It seems like the ECB action is more of a stop the Euro rise type of response.
After getting ahead of the Fed, with a rate rise, the ECB seems to be more closely following the view of the Fed that commodity prices may be peaking and that the increase in food and energy prices will slow in the second half of the year. If there is a slowdown, there will be less need to raise rates and place downward pressure on European economies.
Core Euro-region inflation is still only 1.3% which is very much in check, but the PPI is hovering around 6% and headline inflation is above the target rate. Given the often loose link between rate changes and inflation, it is hard to fix what should be the right interest rate, but the ECB has other things to worry about. A strong Euro hurts exports and any slowdown will carry over to debt issues.
It seems like the ECB action is more of a stop the Euro rise type of response.
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