Friday, April 28, 2006

New Data Increases Urgency of ECB Rate Hikes

Today we saw yet more reports that increase the urgency for the ECB to raise interest rates. First and perhaps most importantly, we saw the M3 money supply growth rate accelerated to 8.6% (from 7.9%) in March while private sector debt growth rose to 10.8% (from 10.4%). Meanwhile, consumer price inflation rose to 2.4% in April and the February current account balance showed a deficit of €1.8 billion, compared to a €4.8 billion surplus in February 2005.

All this comes after several reports indicating that the cyclical growth have strengthened considerably in recent months in the Euro-zone and that commodity prices have soared.

The ECB would in this context be simply crazy to abstain from raising rates at its next meeting in early May, like ECB chief Jean-Claude Trichet hinted. Some analysts are now suggesting that they will do it after all or that they will raise rates by a full 50 basis points in June. That is a absolute minimum necessary for them to retain any credibility with regards to "fighting" (i.e. not creating) inflation and financial imbalances. However, while that is clearly what they should do, Jean-Claude Trichet's latest statements indicate that they might not do it. If so, then Trichet will follow the same path as Alan Greenspan of having created mayor economic imbalances by keeping rates too low for too long and then raise them too little too late.


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