Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

ECB Signals Hawkish Tone on European Interest Rates as Inflation Soar

Interest-Rates / Euro-Zone Jun 09, 2008 - 04:08 PM GMT

By: Victoria_Marklew

Interest-Rates Best Financial Markets Analysis ArticleAs expected, the European Central Bank (ECB) left its refi rate at 4.0% again last Thursday. What was not expected was the hawkish tone of the subsequent statement and the press briefing from President Trichet. He noted that the Governing Council had a "deep discussion" (trans: "fierce debate"?) and remains "in a state of heightened alertness." Some members apparently wanted a rate hike this month but the consensus was to hold. The President then noted that the Council may decide to make "a small hike" at the July 3 meeting in order to anchor inflation expectations.


The statement emphasized that risks to prices remain clearly on the upside and have increased further. And, Trichet reiterated that the bank's mandate is to ensure medium-term price stability, which means firmly anchoring inflation expectations. The euro promptly firmed anew.

Thursday's policy meeting took place against the backdrop of the ECB's ten year anniversary. Back on June 1, 1998, annual inflation in the eleven countries joining the Euro-zone was running at just 1.4%, a barrel of Brent crude cost $15.60, and 3-month Euribor stood at 3.575%. While the 2000-2001 period brought a spike in inflation and market rates, the rest of the decade was fairly predictable policy-wise as price increases moved pretty much hand-in-hand with growth.

Chart 1

Thursday's ECB faces a much more challenging world. Inflation is rising, the interbank market is still struggling, and the macroeconomic impacts of the US slowdown and global financial turmoil are now coming home to roost. Inflation in the 15-member 'zone climbed to 3.6% in May, Brent crude stands at $128pb, and 3-month Euribor hit 4.864%, the highest so far this year. On the plus side, ECB policy-making has clarity, coherence, and credibility, all of which were sorely lacking a decade ago.

The ECB and its President apparently have decided that their best course is to stick firmly to the bank's mandate of maintaining price stability. Trichet himself set the tone at a speech this past weekend, when he warned that bad management of the oil crisis back in the 1970s (large wage rises and low interest rates) seriously hurt the economy. He concluded by warning that the errors of the past must not be repeated.

As noted, Euro-zone headline inflation jumped to 3.6% in May. The pace of M3 money supply growth (something the Council is known to watch closely), which appeared to be on a downward trend in recent months, nudged back up to 10.6% in April from 10.1% in March. As Trichet pointed out, while this probably overstates the underlying pace of monetary expansion thanks to financial market upheavals, the underlying rate of money and credit growth remains strong.

Chart 2

Add in better-than-expected GDP growth in Q1 - up 0.8% on the quarter and 2.2% on the year - and the case for a July rate hike looks clear. Except, of course, that forward-looking data point to much slower growth for the 'zone as a whole in Q2, while the outlook for some countries is downright gloomy.

Retail sales across the 15 'zone countries fell 0.6% m-o-m and 2.9% y-o-y in April (-0.9% and -2.3%, respectively, in March) as increasingly-expensive oil and food hit consumers' purchasing power. The European Commission's economic sentiment survey for May showed consumer confidence hit its lowest level since September 2005 although overall sentiment did at least stabilize and inflation expectations continue to hover around the same level as last summer.

Chart 3

Euro-zone services PMI slipped closer to contraction in May, coming in at 50.6 from 52.0 in April, and took a particularly sharp hit in France, while Italy saw services PMI contract for the third straight month and Spain for the fifth. Industrial new orders for the Euro-zone were much weaker than expected in March, shrinking 1.0% on the month and 2.5% on the year. And came the news that manufacturing orders in powerhouse Germany slipped 1.8% on the month in April as capital goods orders from other Euro-zone states dropped 9.0% - a reflection perhaps of rapid cooling in the likes of Spain and Ireland.

So, what are the odds of a July rate hike? The ECB's mandate is to keep inflation "below but close to 2%" in the medium term. That qualifier allows some wriggle-room - the Council can say that current conditions are temporary and prices will come back toward target in the "medium-term" and can define that however it sees fit. For now, our hunch is that the Council will continue to talk tough but the consensus to stand pat will prevail. As always, though, watch the data.

By Victoria Marklew
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Victoria Marklew is Vice President and International Economist at The Northern Trust Company, Chicago. She joined the Bank in 1991, and works in the Economic Research Department, where she assesses country lending and investment risk, focusing in particular on Asia. Ms. Marklew has a B.A. degree from the University of London, an M.Sc. from the London School of Economics, and a Ph.D. in Political Economy from the University of Pennsylvania. She is the author of Cash, Crisis, and Corporate Governance: The Role of National Financial Systems in Industrial Restructuring (University of Michigan Press, 1995).

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Victoria Marklew Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in