ECB Meeting: Expect Strong Words But No Action

Thursday, November 03, 2005

Today's meeting of the council of governors of the ECB will with a 99% probability end as all other meetings in the last two years. Expect strong words about inflationary dangers but no change in monetary policy. Lacklustre growth in Europe that is on the verge to topple over into a mild stagflation will be a bigger concern to Europe's central bankers who are very close to violating their mandate as they look on while prices and especially money supply are on the rise.
Trichet will reannounce an October inflation rate of 2.5% (2.6%), already reported in this blog last Sunday and try to appear not too nervous about runaway money supply growth. M3 growth accelerated to an annual rate of 8.5% (August 8.3%) in September and M1 is expanding at a rate above 11% since summer. A - not so - funny explanation for the high growth of the cash component of the money stock may be that Russians, traditionally holders of thick cash bundles, are diversifying out of dollars into Euros. The acceptance of dollars is fading in favor of the Euro in Eastern Europe, I am being told by businessmen active there.
If you wonder where all this money goes, just look at the governments who are heavily in the borrower's seat, trying to stimulate their economies. It is a catch 22 though. Trichet is worried about lax fiscal policies as well.
From my feeling consumers are scaling back their expenditures already which leads to the conclusion that the Euro members have bigger economic worries than the most recent slightly stronger forward looking indicators reflect.
German bund yields have already reversed their downward trend in the last couple of days, indicating that markets see a rising possibility of higher interest rates in the not too distant future.
Analysts have raised the possibility that money supply growth will force the ECB off the autopilot as soon as December. I fully agree that this would only be reasonable if the ECB wants to remain credible in the eye of the markets.
ADVISORY: For the simple reason of time I will not be able to cover Alan Greenspan's testimonial about the economy to Congress which starts shortly after the ECB press conference. See it covered for blogosphere by the familiar Fed watchers listed in the blogroll in my sidebar. (For MS Internet Explorer users: Scroll down all the way. This blog is posted to via Netscape and checked by me in Apple's Safari browser where it looks flawless in terms of design. Windows users are recommended to download the Firefox browser.)


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