December Draws Closer ...
... and so does also the ECB meeting where it is to be decided whether to raise rates in the Eurozone or not and I have to side with Bloomberg Matthew's Lynn on this one. All things equal which first and foremost include a above target money supply and the fear of structural inflation pressures I still think it would be wise for the ECB to hold their breath going into 2007. However, there is not much which indicates that this is one the table given the discourse maintained in Frankfurt and on that note you should not get me wrong here. Holding in December will not solve many problems for the ECB but at some point we need to look at what is really going on and ask ourselves what all this talk on 'normalization of interest rates' is really all about? As I have indicated before, the idea of a normal/neutral rate in the Eurozone is really not worth much since it neglects the fundamental imbalances of the Eurozone countries. Furthermore, the current situation in Italy and Germany where growth is slowing, fiscal tightening awaits in 2007 and consumer spending remains low demands that we deploy some new analytical tools. Finishing off with Matthew Lynn's piece he also raises the general question of 'aversion towards reversal' in terms of central banking. Will the ECB lose points in terms of confidence from markets by changing stragegy now or would it indeed lose points by remaining unable to react according to the reality in which it is situated?
(Quote Matthew Lynn - bold parts are my emphasis)
The European Central Bank's governing council has made no secret of its intention to raise interest rates when it meets early next month.
It has been busy telling the market to expect at least another quarter-point increase from the current 3.25 percent. Rates could easily go up again early next year as well.
Just because it seems inevitable doesn't mean it is the right thing to do. While the ECB is talking tough on rates, the euro-area economy is showing signs of slowing.
The ECB needs to demonstrate that it has the flexibility to respond quickly to changing economic circumstances. Otherwise there will be a question over how capable it is of doing its job.
Postponing a rate increase in December would be the best place to start. It would win the bank some kudos.
Consumer prices rose 1.6 percent in October from a year earlier, according to Eurostat, the European Union's statistics office. That compares with a 1.7 percent gain in September. Inflation is now running at the slowest pace in more than two years. Doesn't that suggest the rate increases already administered have been enough to bring prices under control?
The ECB would surprise the market if it paused next month. Yet it would also show it has the flexibility needed to manage the euro-area economy. After all, what is the point of a central bank that can't change its mind when circumstances change?