Thursday, June 05, 2008

Will ECB Raise Interest Rates?

ECB chief Jean-Claude Trichet today signaled that the ECB might raise interest rates next month. Considering that he explicitly sais that it wasn't a certainty and considering that they September last year cancelled a previously signaled rate hike, this does not mean that they will necessarily do it, only that they might do it. But that is not a trivial statement, considering that they've previously indicated virtually no chanse for either a hike or a cut.

Considering that both monetary and price inflation is well above their targets, there is little doubt that the ECB should raise rates, and in fact raise it more than the more quarter point they're likely to move with if they move. And their possible move now, or more correctly the inflationary pressures that motivates it, certainly confirms what I wrote from the start, namely that it was a big mistake for the ECB to cancel its planned rate hike back in September 2007. If they raise rates now they will make the future problems somewhat smaller tham if they don't do it, but it will still be too little, to late to avoid continued strong inflation in the short- to medium term perspective.


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