Thursday, March 08, 2007

More ECB Rate Hikes Should And Will Come

As just about every economic analyst expected given the use of the magic word "vigilance" at the last meeting, the ECB raised interest rates today, to 3,75%. While no rate hike is likely the next meeting given the fact that the word vigilance wasn't used today, it will likely come in the next 3 months. Escpecially given the fact that ECB chief Jean- Claude Trichet used the phrase "accomodative" to describe ECB policy.

It certainly is an "accomodative" (i.e. inflationary) policy given the fact that M3 money supply grows at a 9,8% rate. While lower oil prices have helped push consumer price inflation slightly below the supposed 2% ceiling, the momentum is clearly in favor of rising inflation given the rapid money supply increases which in turn have increase in the price of other commodities and contributed to tightening labor markets, which in turn have emboldened unions in Germany and elsewhere to demand high pay increases.

Given this, more rate increases are inevitable. The ECB by keeping interest rates too low for too long and then being too slow to raise them again will face consumer price inflation over 2% again soon. To correct past mistakes, they will have to raise more dramatically than had been necessary had they not kept them so low in the past.


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