Euro CB's stay put

Thursday, April 06, 2006

Both the ECB and the Bank of England (BoE) decided today to leave leading interest rates unchanged at 2.5% and 4.5% respectively. Statements by ECB president Jean-Claude Trichet at a press conference were understood by markets that way that the ECB will probably sit on its hands again at the next council meeting in May; defying price risks from crude oil which seems to trade a solid path towards $70 per barrel. In the United Kingdom property agents could wipe away the sweat on their foreheads after the BoE announced its message about inaction.
Currencies saw sharp swings after the announcements. The Euro weakened to $1.2220 after reaching at new 2006 high at $1.2330 and Sterling firmed against both the dollar and the Euro. Gold moved to a 25-year high at $596 and silver broke the $12 barrier.
Europe's rising money supply is increasingly feeding a housing bubble by now (yes, European stocks are rallying too.) Trichet said in his comparably brief introductory statement that latest developments
"confirm that the stimulative impact of the low level of interest rates remains the dominant factor behind the high trend rate of monetary expansion. Moreover, the annual growth rate of credit to the private sector has continued to increase over recent months, with borrowing by households - especially loans for house purchase - and non-financial corporations rising rapidly. Overall, strong monetary and credit growth in an environment of ample liquidity in the euro area continues to point to upside risks to price stability over the medium to longer term."
I was not able to follow the press conference but the following statements from Trichet do not exactly sound dovish.
"To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, and the economic analysis indicates that the risks to price stability remain on the upside. Given the strength of monetary growth and the ample liquidity situation in a context of improving economic activity, cross-checking the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability over the medium to long term prevail. It is essential that medium-term inflation expectations remain firmly anchored at levels consistent with price stability. Accordingly, the Governing Council will continue to monitor very closely all developments to ensure that risks to price stability do not materialise..."
Political reality in the EU may lead to the point where inflation fighting becomes a lip service because deficit-expansive politicians are horrified by a higher rate outlook. Both inflation and money supply hover above the target rates set by the ECB at 2% for inflation and 4% for money supply and the ECB still does not move aggressively to stem these dangerous developments that can be derived from exploding producer prices.
SPOTTED IN BLOGOSPHERE: Macroblog dug out old US anti-inflation propaganda. Best comedy I've seen in years. Evil German whispers trying to hook Americans to inflation...
I wonder when it will be discovered by politicians that high oil prices are inflation initiated by Muslims.


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