Friday, 28 March 2008

"Alarming" Inflation, Interest Rates Going Up?

European Central Bank council member Axel Weber said the bank will raise interest rates if needed to contain ``alarming'' price pressures, even as a global credit squeeze threatens to damp economic growth.

Inflation in the euro region accelerated to 3.3 percent in February, the fastest pace in 14 years. The ECB has refrained from following the U.S. Federal Reserve in lowering borrowing costs to bolster economic growth.

The ECB aims to keep inflation just below 2 percent.

If inflation goes higher then the ECB has no choice then to deliver a rate rise in order to get the price stability they promised to the 300 millions citizen but in particular to those pensioners, low income, middle income and student (the new poor when inflation is triggered).

So far it has failed its mandate for the past year and forecasted it will fail for the rest of the year but promised that 2009 or 2010, inflation will go below the 2% threshold.

In the past, the seventies, inflation was raging while interest rate was low, artificially low thus benefiting the house owner or debt holder. Today that premise in untrue since the ECB will make sure that current rate are high enough to stop inflation.

Look at Iceland, this week they have raised interest rates to 15% amid a devastating inflation and a weakening currency. The Icelanding bank reacted too little and too late.

Now don't be fool. Europe will be affected by the global credit crunch, it's just a matter of time. UK and Spain most probably will be hit first in the next few months and the rest will follow suit.

In that sense, they are right to predict that inflation will go down next year as Europe might see a recession in 2009. How deep it is going to be?, it all depends...

interest rates will come down maybe after the summer or later in the year as the global economy ex-U.S. start to contract... U.S. has already entered a recession and will probably know one that will last longer than the last two (1991, 2001).

After all credit will not go any more for funding real estate but instead redirected to business for improving productivity in time to prepare the mass retirements that will start to hit Europe in 2010-2015...

1 comment:

Anonymous said...

European inflation accelerated this month to the fastest in almost 16 years, heightening the European Central Bank's quandary at a time when the economy is cooling and confidence is falling.

Consumer-price inflation in the euro area accelerated to 3.5 percent in March, the highest since June 1992, the European Union's statistics office in Luxembourg said today.