Still Holding, but Gearing Up For a March Hike
First of all I should apologize since I am almost always pretty quick to react on ECB decisions but this week I was caught up in other things. But here we go with Alpha.Sources analysis of the ECB decision and more importantly the decision which is likely to come. In terms of the actual facts the ECB chose to sit tight this week for the second consecutive time in 2007 but with an almost sure promise to push up rates to 3.75% in March. In many ways you have to admire the relationship between the ECB and the markets in terms of communications and essentially semantics. As such, vigilance seems once again to be the important sentiment to watch out for (from Bloomberg) ...
European Central Bank President Jean- Claude Trichet signaled the ECB will raise interest rates next month as the pace of economic growth threatens to fuel inflation.
``Strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialize,'' Trichet said at a press conference in Frankfurt today. The bank left its benchmark rate at 3.5 percent, a level he referred to as ``low.''
Trichet, who has used the word ``vigilance'' to signal each of the ECB's six rate increases since late 2005, is preparing for a seventh as wage demands in Germany and surging money supply growth fan inflation.
In terms of more in-depth analysis EuroIntelligence has a good round-up and also offers a good analysis of the ECB's policy going forward I think. I think that there are two important points to note. First of all, EuroIntelligence notes that the ECB is not lying sleepless at night fearing over inflation. I don't know whether I would put like this but I need to once again draw the attention away from the persistent flaw of looking at Eurozone aggregate figures here and as such I believe that certain countries are much closer to deflationary pressures than the other way around. I have argued this in relation to Germany over at AFOE but also Italy and perhaps Finland need watching. The second point of note from Eurointelligence is that the interest rate outlook beyond the March hike is pretty unclear. I agree here and of course have been arguing this for some time now since I am of the belief that the business cycle already turned back in the summer of 2006. Of course the growth of the money supply (M3) and its probable relationship with the carry trade is joker here but then again I do not think that the transmission mechanism between inflation and monetary growth at this juncture can be found by studying economic textbooks. This is a complex issue but it has do to with the global liquidity situation and how this relates and indeed responds to the sustained (and in fact converging) process of ageing. I will have more on that at a later point.
Essentially I have long been on the back of the ECB and its policy decisions and ultimately I think that rates have been pushed a nudge too far since the contraction process began in 2006 and I fear that Germany and especially Italy can and will the price in 2007 and indeed going forward as well. I don't want to branded as a ranter here but essentially I believe that there are demographic factors which are quite simply not accounted for to a satisfying degree. Ending on the actual interest rate decision of the ECB, Trichet has indeed promised a raise in March ... let us see whether he can deliever on that promise.