ECB Stays On Autopilot - Inflation Picks Up Speed In June

Thursday, July 07, 2005

The European Central Bank has left its leading interest rates unchanged. Although inflation in the Euro area accelerated to an annual rate of 2.1 (1.9) percent in June, ECB-president Jean-Claude Trichet said he sees no significant underlying pressures regarding inflation, only to backtrack from this statement immediately. Risks to prices were related to oil prices and wage demands, he said in a webcasted press conference on Thursday after the ECB governors meeting. Regarding the explosions in London he said he was in permanent contact with the Bank of England's head Mervyn King, but markets and payment systems were unaffected. He did not expect the explosions to have any significant impact on the markets.
Trichet said again that liquidity in the Euro are was ample and pointed to strong growth of money supply M1 which grew at an average rate of 9.5 percent in the March-May period. The Prudent Investor notes such high growth rates were last documented in post-unification Germany.
Trichet urged Euro-members to shore up their runaway budget deficits as the current situation would not leave much room to maneuver in the case of - unspecified - adverse effects.
Regarding oil prices Trichet asked consumers and producers to act as responsible as possible. Surveys in European media show that consumers have been reducing their driving because of high gasoline prices already. And what is the prime responsibility of a nationalized Middle Eastern oil producer? Is it
a) to provide the west with cheap energy; or
b) to secure as much money as possible for his respective country in order to provide for the long-term future once the oil fields dry up?
High oil prices are beginning to take their toll on European growth expectations already. Trichet projected lower growth rates for the second half of 2005 than the 0.5 percent (quarter-on-quarter) seen in the first half.
Euro CB's Sold 240 Tons of Gold In 1st Half of 2005
Euro area central banks stepped up their gold sales during the recent period when gold traded around 440 dollars an ounce. Including last week's sales with a volume of 360 million Euros by 3 member central banks total gold sales reached a volume of 2.572 billion Euros in the first half of 2005, The Prudent Investor's calculations show.
At an assumed average price of 430 dollars and an average Euro rate of 1.25 dollars this represents 7.477 million ounces gold or almost 240.
China announced today that it will introduce physical gold buying for individuals soon. Until now Chinese were only allowed to buy gold certificates, Reuters reports. China consumed 234 tons of gold in 2004 of which 9.8 tons were for investment purposes.
The biggest physical buyer of gold is India which imports somewhere in the region of 600 tons annually.

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