ECB Will Do - Nothing

Thursday, January 12, 2006

The European Central Bank (ECB) will most likely leave its leading overnight interest rate unchanged at 2.25% at today's meeting of its governing council. ECB president Jean-Claude Trichet will base the decision on the slightly lower inflation rate that was calculated at an annual rate of 2.2% in a first estimate for December 2005. In November inflation had come in at 2.3%. I cannot withhold my skepticism about the official European inflation rates as they stand in stark contrast to my January bills. Probably I am eating too healthy, should stop heating my apartment and should cancel my health insurance to come closer to these official inflation rates.
Producer prices in the Eurozone fell 0.2% month-on-month in November, but rose 4.4% year-on-year. But suuuuure, all this inflation we feel is only a dream (nightmare) and certainly not true.
I would believe this if corporate profits showed a decline, but the European stock rally came on the heels of rising profits. So what is wrong in my obviously distorted picture?
Trichet's position of staying put is also helped by latest developments in Euro money supply. In November 2005 M3 has slowed to 7.6% (October 8.0%) and the 3-month average has been 8% as well. M1 slowed from 11.2% to 10.6%. I attribute the strong growth in M1 to cash-loving Russians and other non-Euro members who are swapping their dollar bundles for Euro stacks.
While all these figures at least show the right trend they still lie way above of the ECB's policy goals.
The ECB's mandate requires the Euro central bankers to keep inflation below 2% and has set the target rate for money supply at 4.5%. Both this targets have been overshot for half a year before the ECB changed rates last December for the first time in two and a half years.
So expect a lot of words about the positive economic outlook - as could be heard in the last 12 months - and don't expect any attending journalist to squeeze Trichet about the impact of high oil and record natural gas prices or the political pressure on the ECB not to fight inflation too much in the face of an 8.3% Eurozone unemployment rate. Bonjour tristesse.
NOTE: I am afraid I will not be able to cover the Q&A session of the ECB press conference. In December the webcast was cancelled.
UPDATE: Find a link to the webcast of the press conference at 1330 GMT here. There is also a link for a Podcast audio feed. Wow, they got (techno) style.


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