Debate Politics Forums - View Single Post - European Central Bank Likely to Raise Rates

donsutherland1 · 07-03-08, 11:23 AM

This morning, the ECB hiked its benchmark interest rate to 4.25%. Jean-Claude Trichet's statement explaining the decision was pretty much along the lines of what had been noted in the opening post in this thread. Furthermore, contrary to the doom-and-gloom pronouncements peddled by some inflation doves, Wall Street responded positively to the decision, as futures strengthened in pre-market trading immediately following the decision.

A quick look at what the statement said vs. what I had expected to see:

• The decision to raise the benchmark rate will help ensure that inflation expectations remain anchored.

Statement: "On the basis of our current assessment, the monetary policy stance following today's decision will contribute to achieving our objective [of price stability in the medium-term and keeping medium- and long-term inflation expectations firmly anchored]."

• The Harmonized Index of Consumer Prices (HICP) “has remained above 3% for the past eight months.”

Statement: "...annual HICP inflation has remained well above the level consistent with price stability since last autumn..."

• The HICP reached 4.0% in June 2008.

Statement: "...according to Eurostat's flash estimate--4.0% in June."

• The risks to price stability over the medium-term have continued to increase.

Statement: "...very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions confirm our assessment of upside risks to price stability over the medium term." and "Risks to price stability at the policy-relevant medium-term horizon remain clearly on the upside and have increased further over the past few months."

• Inflationary pressures have remained more persistent than previously expected.

Statement: "We are thus currently experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than anticipated some months ago."

• Higher than anticipated wage growth could emerge, increasing the risk of “second round effects.”

Statement: "There is also a very strong concern that price and wage setting behaviour could add to inflation pressures via broadly-based second round effects."

• Timely and firm action will help prevent “second-round effects” and reduce the risks to medium-term price stability.

Nothing explicit on this point. The idea that such action would be effective was implicit in the statement that, "today's decision will contribute to achieving our objective..."

• The ECB remains determined to ensure that medium- and long-term inflation expectations remain anchored.

Statement: "...it is our strong determination to keep medium- and long-term inflation expectations firmly anchored in line with price stability..."

• The ECB will continue to monitor developments.

Statement: "We will continue to monitor very closely all developments over the period ahead."

Also, the ECB urged private and public sector participants in wage-related negotiations to avoid nominal wage schemes that could trigger a wage-price spiral.

Finally, the ECB did not rule out or indicate future interest rate hikes. Instead, in the press conference that followed, Jean-Claude Trichet stated, "Starting from here, I have no bias."

All in all, the ECB's decision, policy statement, and Jean-Claude Trichet's remarks at the press conference were in line with what I thought was likely. I believe the decision is a sound one. Moreover, it was a decision that was well-received in the financial markets. Despite a somewhat weaker employment report than had been expected in the consensus estimate by economists, the Dow Jones Industrials were up more than 90 points just after 11:20 am.

Later developments could still impact the course of trading. But what is relevant is that the ECB's decision did not bring about the adverse impact some of those who opposed the rate hike predicted. Rather, contrary to their expectations, the financial markets liked the move.

07-03-08, 11:23 AM	#5 (permalink)
donsutherland1 Moderator Mod team member Join Date: Oct 2007 Last Online: Today 08:58 PM Location: New York Posts: 2,467 Thanks: 814 Thanked 1,572 Times in 877 Posts Lean: Centrist Gender: Awards:	Re: European Central Bank Likely to Raise Rates This morning, the ECB hiked its benchmark interest rate to 4.25%. Jean-Claude Trichet's statement explaining the decision was pretty much along the lines of what had been noted in the opening post in this thread. Furthermore, contrary to the doom-and-gloom pronouncements peddled by some inflation doves, Wall Street responded positively to the decision, as futures strengthened in pre-market trading immediately following the decision. A quick look at what the statement said vs. what I had expected to see: • The decision to raise the benchmark rate will help ensure that inflation expectations remain anchored. Statement: "On the basis of our current assessment, the monetary policy stance following today's decision will contribute to achieving our objective [of price stability in the medium-term and keeping medium- and long-term inflation expectations firmly anchored]." • The Harmonized Index of Consumer Prices (HICP) “has remained above 3% for the past eight months.” Statement: "...annual HICP inflation has remained well above the level consistent with price stability since last autumn..." • The HICP reached 4.0% in June 2008. Statement: "...according to Eurostat's flash estimate--4.0% in June." • The risks to price stability over the medium-term have continued to increase. Statement: "...very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions confirm our assessment of upside risks to price stability over the medium term." and "Risks to price stability at the policy-relevant medium-term horizon remain clearly on the upside and have increased further over the past few months." • Inflationary pressures have remained more persistent than previously expected. Statement: "We are thus currently experiencing a protracted period of high annual rates of inflation, which is likely to be more persistent than anticipated some months ago." • Higher than anticipated wage growth could emerge, increasing the risk of “second round effects.” Statement: "There is also a very strong concern that price and wage setting behaviour could add to inflation pressures via broadly-based second round effects." • Timely and firm action will help prevent “second-round effects” and reduce the risks to medium-term price stability. Nothing explicit on this point. The idea that such action would be effective was implicit in the statement that, "today's decision will contribute to achieving our objective..." • The ECB remains determined to ensure that medium- and long-term inflation expectations remain anchored. Statement: "...it is our strong determination to keep medium- and long-term inflation expectations firmly anchored in line with price stability..." • The ECB will continue to monitor developments. Statement: "We will continue to monitor very closely all developments over the period ahead." Also, the ECB urged private and public sector participants in wage-related negotiations to avoid nominal wage schemes that could trigger a wage-price spiral. Finally, the ECB did not rule out or indicate future interest rate hikes. Instead, in the press conference that followed, Jean-Claude Trichet stated, "Starting from here, I have no bias." All in all, the ECB's decision, policy statement, and Jean-Claude Trichet's remarks at the press conference were in line with what I thought was likely. I believe the decision is a sound one. Moreover, it was a decision that was well-received in the financial markets. Despite a somewhat weaker employment report than had been expected in the consensus estimate by economists, the Dow Jones Industrials were up more than 90 points just after 11:20 am. Later developments could still impact the course of trading. But what is relevant is that the ECB's decision did not bring about the adverse impact some of those who opposed the rate hike predicted. Rather, contrary to their expectations, the financial markets liked the move.