Thursday, April 17, 2008

Of Course They're Not High Enough

ECB hawk Axel Weber again hints that he would really like to see interest rate increases, after Euro area inflation hits new all time high of 3.6%, and even the so-called core rate (excluding energy, food, alcohol and tobacco) hitting a new high of 2.0%.

It seems clear to me that Weber really wants to raise interest rates and that the ECB would have already done that if it had been up to him alone, but that he is outvoted in the ECB board by more dovish members who wants to keep interest rates on hold or even cut them. Anyway Weber says

"We will have to continuously monitor closely all incoming data and evaluate whether the current level of interest rates in fact ensures price stability."

Actually though, there's no question in my mind, and probably not Weber's either, that it doesn't. The ECB made a big mistake in canceling its planned rate hike last September, and because of that and previous feet-dragging when it comes to raising interest rates, inflationary pressures are strengthening. The ECB and the rest of Europe are now witnessing the fact that if you try to avoid an economic downturn by adding more inflation, you will end up with both.


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