Thursday, 28 August 2008

Ooops: Interest Rates Won't Come Down??


"European Central Bank council member Axel Weber said there's no scope for interest-rate cuts and the bank may even need to raise borrowing costs again once the economy emerges from its slump.

'Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature,' Weber, 51, said in an interview in his office in Frankfurt yesterday. 'If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary.'

'we're not even sure that inflation on average will be below 2 percent in 2010,' Weber said.

'If inflation risks further materialize and if we come to the conclusion that the inflation outlook has deteriorated, we'll have to re-examine our monetary-policy stance,' he said. 'At the moment, this isn't an issue.'"



That comes as a shocker!...that defies what most economists and analysts have been forecasting...unless it's a bluff which will make Axel Weber a master poker player and ECB Trichet a chess master...

In that sense, I kind of agree with Dr. Weber with this approach. You just have to go back in history to see that policy mistakes have been made since often they underestimated the strength of the economy thinking that it was weakening too much and lowered iterest rates to only fuel inflation and exarcerbate current "bubbles".

In 1987, there was a massive stock market crash - 20% down for the dow jones in one day in the U.S. , interest rates were cut to only fuel an asset bubble worldwide.

In 1997, there was the Asian crisis that had its own banking crisis and asset deflation. They cut interest rates to only fuel what was the biggest Technology bubble in history.

Some investors are asking the ECB to cut interest rates , they are trying to push for a policy mistakes as greedy investors always profit massively during time of high volatility and asset bust.

On the other hand what would be the consequence if interest rates were to go to 5% or higher...maybe massive defaulting for those who have been borrowing on variable interest rates which represents about 90% of the Finnish lending...

1 comment:

Andrew said...

Thanks to the Nordic model even though child care costs went up to pay for the new opera, baby food manufacturing is moving to Finland from Norway to help out the Finnish economy:-)

And Russia pleased that Finland did not upset them too much over Georgia and greatful for the help with city sewage and toxic waste at nuclear plants is happy to continue buying baby food from finland!

It is a win win situation. What is more those clever Fins just cant help selling even more high quality engineering components!

Today.....

Finnish gearbox maker Moventas said in a statement Thursday it had won orders worth about 140 million euros for wind turbine gearboxes.

*and*

Nestlé would shut down a baby food factory in Norway and transfer most of its capacity to Finland.

Kauppalehti added the decision was motivated by rising sales in Russia.

Last year, exports to Russia grew by 28 per cent

Yesterday......

Finland's centre-right government proposed 870-million-euro income tax cut package as a perfect response to the weakening of the global economic outlook."

Seems like the inflation outlook is developing nicely!

"Bundesbank president Weber went as far to say he believed rates were still on the accommodative side of neutral and that he didn’t necessarily believe inflation would ease because of weaker growth. "

Meanwhile for other parts of the global economy let us pray.

'Even though i walk thru the valley of the shadow of death i shall fear no evil, for thy rod and staff do comfort me and my cup runneth over'