Friday, 29 August 2008

Next, A Rate Hike?

"Inflation is still high, too high," said Bini Smaghi, an ECB Member
"The ECB has only one tool for fighting inflation -- interest rates.
"But we're not the only players. There are others," Bini Smaghi said. "Everyone must adhere to this objective, which is price stability"

Bini Smaghi, as well as other ECB Members, are clearly sending a strong message to Producers and Unions. Should you pass commodity price increase to consumers, we will respond by hiking rates that will eventually slow further the economy, erode your profits but eventually put an end to a possible Spiraling Inflation...

It is clear in Finland that no one is listening this clear message. Even the "Uusimaa" Finance Minister Katainen is setting a platform that will allow price increase to materialize as they will cut tax and ramp up government spending.

Politically allowing structural change come at a price: losing power. Do they (National Coalition Party) want to lose political power in order to have a better and competitive economy: no, that's the human nature.

So it seems that the ECB is preparing the market that an interest rate hike in on the card. Should that happen, the housing market will eventually crash as borrowers, mainly on variable interest rates (90% of Finnish household), will be squeezed between increasing cost and a decreasing purchasing power.

But for the moment, an interest rates hike is too premature to call and seem improbable as the local and global economy is decelerating at record pace unless Unions ask for massive pay rise and producers shut their ears...

1 comment:

Andrew said...

Housing Finland

The key here is that Central banks dont set interest rates. Instead they defend a target rate. The problem then becomes the target rate has to be one that is defendable in a manner that guides the money market rather than overwhelms it with cheap inflationary money to stop rates from rising.

Rates obviously want to go higher and there is not much the ECB can do unless it just wants to make things worse.

We have all the makings of a multi generational crisis of the sort our grandparents and great grandparents lived thru.