Revisiting the ECB Playbook?

money.jpgIt sure seems to be a good idea since inflation is falling fast. Some might think this is a good thing but if you argue like me that Eurozone growth is and has been for some time now very fragile I am not sure that this is what we want. Rememeber here that fiscal tightening (which is pretty neccessary) also levies deflationary pressures.

(From the FT linked above - bold parts are my emphasis)

French inflation decelerated sharply last month, according to figures on Friday that added to evidence that the European Central Bank had been too gloomy about eurozone price pressures.

Tumbling energy prices led to the annual inflation rate in France falling from 2.1 per cent in August to four-year low of just 1.5 per cent in September, according to the Insee statistical office.

Germany’s inflation figures were revised downwards earlier this week to show a rate of only 1.0 per cent in September.

As a result, the September inflation rate for the 12-country eurozone, released next week, could be revised downwards from the already-low 1.8 per cent initial estimate, analysts said.

That would increase still further the presentational difficulties facing the ECB as it gears up for another quarter percentage point rise in its main interest rate, expected in December.

The ECB frets about the inflationary implications of fast-growing credit and money supply figures and Jean-Claude Trichet, ECB president, argued earlier this month that risks up to eurozone price stability were “clearly on the upside”.

But a rift is opening up with financial markets. “The recent easing in oil prices twists the risk balance to the downside, said Nicolas Sobczak, economist at Goldman Sachs in Paris. Eurozone inflation in October could fall as low as 1.5 per cent – the lowest since November 1999, he added.

The ECB, which aims to keep inflation within a range “below but close” to 2 per cent, fears that the strength of eurozone economic growth will add to underlying inflation pressures, for instance by encouraging higher wage settlements. Statistical effects of recent oil price falls will also fade.

Friday’s French data suggested underlying inflation pressures in September were more subdued than expected, with core inflation, excluding oil prices, falling.

However, eurozone inflation will almost certainly be pushed sharply higher at the start of next year by a three-percentage point rise in German value added tax.

“Without the wretched VAT increase, the ECB might be able to downgrade its degree of alertness,” said Julian Callow, economist at Barclays Capital.

“But they have to be concerned – there is a danger that it will feed through.”

Jürgen Stark, an ECB executive board member, told a Dublin audience yesterday that eurozone inflation was “likely to increase again towards the end of the year and in early 2007”.

Inflation on average in 2006 would remain at more than 2 per cent “and is likely to remain so in 2007”, said Mr Stark'