ECB has sent a clear signal to the market that it is more worried about inflation than growth. This has always been the mandate of the ECB but the comments by ban president Trichet make it very clear, or as clear as central bankers are on these issues. He stated that a rate increase is "not excluded" and that it is monitoring prices with "heightened alertness".
The impact on the markets have also been clear. Regardless of whether the Fed is on hold, the comments form the ECB means that the spread in short-rates will be more favorable to Europe. With the Fed still fighting the credit crisis and with being surrounded by recession fears, it is hard pressed to believe there will be the same desire to raise rates. The dollar rally was to some degree associated with the belief that the Fed was on hold, but this is all relative to what is going on in other countries.
Like investors there can be a change in central bank sentiment and in this case it is decidedly moving toward controlling inflation.
The impact on the markets have also been clear. Regardless of whether the Fed is on hold, the comments form the ECB means that the spread in short-rates will be more favorable to Europe. With the Fed still fighting the credit crisis and with being surrounded by recession fears, it is hard pressed to believe there will be the same desire to raise rates. The dollar rally was to some degree associated with the belief that the Fed was on hold, but this is all relative to what is going on in other countries.
Like investors there can be a change in central bank sentiment and in this case it is decidedly moving toward controlling inflation.
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