And More bad news

is_that_so

The ECB may be looking to increase rates. It strikes me more as a case of an extreme obsession with inflation not grounded in reality than with the common sense of helping people get out of the whole credit crunch mess.

http://www.rte.ie/business/2008/0605/ecb.html

The head of the European Central Bank has signalled that it may increase euro zone interest rates at its meeting next month to counter the risks of inflation.

Jean-Claude Trichet made his comments after the ECB kept its main interest rate unchanged at 4% today - as expected. The ECB has a dilemma on rates as it faces a worsening inflation outlook, but also continued uncertainty about economic growth.

Euro zone interest rates have now been on hold for 12 months after tensions in credit markets halted a series of increases between late 2005 and mid-2007.
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Today, the bank raised its euro zone growth forecast for 2008 to 1.8% from 1.7%, but raised its forecast for inflation in the euro zone this year to 3.4% from its previous estimate of 2.9%. The inflation forecast for 2009 was increased to 2.4% from its previous estimate of 2.1%.

Rising food and energy costs pushed annual inflation in the euro zone back up to 3.6% in May, the same level as in March and the highest in the history of the euro zone.

nesf

Better analysis from the FT: http://www.ft.com/cms/s/0/86756b86-32e7-11dd-8a25-0000779fd2ac.html


Trichet being a bit hawkish as per usual. Stronger language than normal though.

leninbenjamin

is_that_so wrote: »

It strikes me more as a case of an extreme obsession with inflation not grounded in reality than with the common sense of helping people get out of the whole credit crunch mess.

wouldn't be the first time either they've acted like so.

nesf

is_that_so wrote: »

It strikes me more as a case of an extreme obsession with inflation not grounded in reality than with the common sense of helping people get out of the whole credit crunch mess.

Is there a liquidity crisis in the Eurosystem?

gurramok

And why is it bad news?

Era of cheap money is over.
There are no specatular housing bubbles in euroland bar Spain and Ireland. The rest of the countries don't have a similar crisis in their economies and they are rightly worried about inflation.

Afaik, it's only the US that has slashed rates because of a housing bubble, the BOE either keeps them at or above 5%, the Aussies and the Swedes have raised rates too to combat inflation.
The ECB unlike the FED has only a mandate to combat inflation. It's up to the individual govts to get growth.

silverharp

OP, its their job to talk tough, the ECB has not hit its inflation target for a while now and it still did not increase rates. also the central bank rate generally follows the short end of the curve but retail borrowing is set more in tune with 10 year rates. the curve can and will steepen and the ECB cannot control this.

nesf

gurramok wrote: »

Afaik, it's only the US that has slashed rates because of a housing bubble

That's a little simplistic. The Fed didn't cut rates because of the housing crash there, it was the housing crash combined with a bunch of other indicators indicating a possible recession that led to that. If the housing crash wasn't part of a much bigger negative picture I don't think it would have provoked such a reaction from the Fed.

gurramok wrote: »

And why is it bad news?

I think the OP thinks that we've been having a similar liquidity crisis in the Eurosystem as has been happening in the US. In that context a rate rise could be viewed as bad news and a central bank out of touch. There wasn't any indication of such a liquidity crisis in the Eurosystem up to at least Spring this year though, which the OP may be unaware of.

Mizu_Ger

Maybe the whole idea of the ECB needs to be changed (if that is possible). Interest rates are increased to combat inflation, which I assume is meant to protect us from price increases, but from the ground level it just seems to put pressure on all of us (and certainly doesn't feel like they are doing us any favours).

On top of this, a large part of inflation at the moment is coming from oil price increases which, as far as I can tell, are due to market speculation rather than actual worth (I may be wrong here, but that's how it seems to me!). This means we get screwed from all directions.

Surely there are other methods of combating inflation. Economic science must have advanced since the original ECB mandate was put in place (I assume this was a long time ago). The current system seems draconian.

gurramok wrote:

The ECB unlike the FED has only a mandate to combat inflation.

If this is so, then why would they ever reduce rates? I thought that they ran a growth/inflation balancing act.

silverharp

Mizu_Ger wrote: »

Maybe the whole idea of the ECB needs to be changed (if that is possible). Interest rates are increased to combat inflation, which I assume is meant to protect us from price increases, but from the ground level it just seems to put pressure on all of us (and certainly doesn't feel like they are doing us any favours).

look at the US , lowering interest rates did nothing for joe six pack , mortgage rates did not go down but the dollar did and reduced purchasing power further.
inflation is a monetary problem, prices rises are simply the effect.

gurramok

Mizu_Ger wrote: »

Maybe the whole idea of the ECB needs to be changed (if that is possible). Interest rates are increased to combat inflation, which I assume is meant to protect us from price increases, but from the ground level it just seems to put pressure on all of us (and certainly doesn't feel like they are doing us any favours).

On top of this, a large part of inflation at the moment is coming from oil price increases which, as far as I can tell, are due to market speculation rather than actual worth (I may be wrong here, but that's how it seems to me!). This means we get screwed from all directions.

Food inflation is an important global problem with food essentials rocketing in price enough to drive up inflation.

Mizu_Ger wrote: »

If this is so, then why would they ever reduce rates? I thought that they ran a growth/inflation balancing act.

Inflation has always been around 2% through those years so they had room to cut rates back then.

Inflation is nearly double that now hence their worry.

ECB mandate is "primary objective of [ECB] shall be to maintain price stability"

is_that_so

The comment was more due to the fact that many banks are not recognising the ECB rates as realistic and have been adjusting their own rates based on inter-bank rates rather than the ECB. They would almost certainly be expected to pass on yet another increase on top of the "adjustments" they have made this year. Is this necessarily good for anyone when EU growth rates are cooling?

I don't deny that the ECB is the Bundesbank in disguise and perennial obsessors of inflation levels. However considering there are so many inflationary factors; food , oil, commodities etc beyond anyone's control, is this target of 2% realistic at this moment in time as a guide?
I would have thought they would allow a little more leeway in their targets as a temporary measure.

Incidentally the FT has this story on European losses.

http://www.ft.com/cms/s/0/28f13802-3349-11dd-8a25-0000779fd2ac.html

nesf

is_that_so wrote: »

is this target of 2% realistic at this moment in time as a guide?[/url]

That is very much up for debate. The thing is, and the point was made by the Economist this week, can they revise the target upwards without also raising inflation expectations and therefore raising inflation? It's a damned if they do, damned if they don't situation in many ways. Not revising it upwards could cost them a lot in terms of credibility if they can't bring inflation back down in the medium term etc.

gurramok

From Bloomberg http://www.bloomberg.com/apps/news?pid=20601087&sid=aS1cq81s4Olk&refer=home

Trichet's remarks suggest Bundesbank President Axel Weber, one of the ECB's toughest inflation-fighters, is winning supporters on the bank's 21-member Governing Council. Weber in January dismissed speculation of a rate cut as ``wishful thinking'' and last month called for the bank to consider raising rates at today's meeting.

The ECB ``will follow words with action,'' Weber told ARD German television after Trichet's comments today. ``We're alarmed about recent price increases and we won't stand by as citizens' purchasing power is lost.''

``We expected tough words from Trichet, but not quite as tough,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich. ``It's almost as if Axel Weber stood right behind him.''

The FED's recent comments about high inflation in the US and not been comfy with a weaker dollar indicates a turnaround in opinion i believe, the battle against inflation takes precedence for now.

nesf

nesf wrote: »

That is very much up for debate. The thing is, and the point was made by the Economist this week, can they revise the target upwards without also raising inflation expectations and therefore raising inflation? It's a damned if they do, damned if they don't situation in many ways. Not revising it upwards could cost them a lot in terms of credibility if they can't bring inflation back down in the medium term etc.

Was at a conference today where this was being asked by one of the keynote speakers.

No solution was offered as they ran out of time, but there were some very interesting points about inflation control in the Eurozone, from both an economic and political viewpoint, however, lack of credibility from not raising the rates wasn't actually mentioned.

nesf

Deleted User wrote: »

however, lack of credibility from not raising the rates wasn't actually mentioned.

I don't think it'll be an issue unless we have a sustained period of global economic conditions that makes keeping Eurozone inflation very low impossible/impractical. Which could happen in the next decade.

Thats more what was being discussed - the problem of exogenous shocks which fall outside of the ECB's remit, eg rising food and oil which raised prices and reduces output.

nesf

Deleted User wrote: »

Thats more what was being discussed - the problem of exogenous shocks which fall outside of the ECB's remit, eg rising food and oil which raised prices and reduces output.

Yup. Greenspan mentioned in his book that it was exogenous factors that helped inflation stay low during his tenure (and I've seen it referred to in papers debating inflation during the 90's and early 00's). Arguably, the ECB's success with its 2% target has been reliant on exogenous disinflationary factors rather than purely on its monetary policies so far.

There are interesting times ahead to be sure.

DishonestPikey

Higher interest rates in the Euro zone means cheaper dollars...which means more people investing in oil....which means higher inflation in the euro zone. I do not think that can be underestimated nor do I think it is over simplifying things. Everything goes back to oil. It is not the average joe soap who is struggling to keep up with bills and mortgage that is fueling inflation (oh look I made a pun). This will not stop inflation. It'll piss a lot of people off, people who think we should control our own interest rates (they were low when they needed to be high and now they're relatively high when they should be low).....i.e get the fook out of the single currency and/or the EU.

shnaek

DishonestPikey wrote: »

Higher interest rates in the Euro zone means cheaper dollars...which means more people investing in oil....which means higher inflation in the euro zone. I do not think that can be underestimated nor do I think it is over simplifying things. Everything goes back to oil. It is not the average joe soap who is struggling to keep up with bills and mortgage that is fueling inflation (oh look I made a pun). This will not stop inflation. It'll piss a lot of people off, people who think we should control our own interest rates (they were low when they needed to be high and now they're relatively high when they should be low).....i.e get the fook out of the single currency and/or the EU.

And go back to when we made such a great job of controlling our interest rates and currency? Like 18% interest rates not 20 years ago? Or a few devaluations on the punt which made us all poorer? I'd rather be part of a strong, recognised currency. The ECB are behaving within their mandate. And they are ignoring politicians, thank God.

topper75

shnaek wrote: »

And go back to when we made such a great job of controlling our interest rates and currency? Like 18% interest rates not 20 years ago? Or a few devaluations on the punt which made us all poorer? I'd rather be part of a strong, recognised currency. The ECB are behaving within their mandate. And they are ignoring politicians, thank God.

Hold on - the ICB used to be independent of politicians too. The only thing wrong with those devaluations was that they didn't come sooner - they were necessary for our foreign trade at the time.

Now we have the ECB - being in the Euro's has done me no favours at all, bar seeing on my fortnight per year trip how badly Irish retailers rip me off for consumer goods.

We had silly low rates when we didn't need them, those rates fueled the housing bubble and led to overvaluation of property and made property difficult impossible to buy for joe soaps trying to get on the ladder.

Now we have silly high rates, when our economy needs a boost to stem the recession tide.

We marched foolishly into it with big mad silly Europhile head on us, thinking only of how good they were to us with structural funds.

That currency will only ever suit Germany and France. We made a big mistake.

topper75

My other conundrum is this rate is to 'stem inflation' ie the evil that erodes purchasing power.

Now my repayments to the bank have 'inflated' and my purchasing power has fallen. - Where is the logic?

Économiste Monétaire

The purchasing power of your money hasn't fallen, you simply have less off it. A euro will still buy you the same thing whether you have 100 or 10. Controlling inflation is paramount to a monetary union.

Clytus

Id have to say even though the series of interest rate hikes have been felt in my household...they were totally predictive. When i think back to the loan rate i had on my first house 2.5%....it hard to believe we were paying such low interest rates.

I fully agree with the ECBs pursuance of price stability...but what i wonder about is the fact they use the PMI as a guide ( I could be wrong in this) to future inflation rates....that they failed to raise rates when the core inflation rate went over 2%.

But heres the paradox....the PMI is heading towards a rate cutting zone....yet euro inflation is exceptionally high...

Whats the ECB to do?

DishonestPikey

shnaek wrote: »

And go back to when we made such a great job of controlling our interest rates and currency? Like 18% interest rates not 20 years ago? Or a few devaluations on the punt which made us all poorer? I'd rather be part of a strong, recognised currency. The ECB are behaving within their mandate. And they are ignoring politicians, thank God.

No but we're in a better position now to become self sufficient. We're also a highly skilled nation as compared to 20 years ago.

the phrase "So long and thanks for all the fish" springs to mind.

Flamed Diving

I can't believe the news about Fannie Mae and Freddie Mac. Things are seriously bad if those guys are allegedly insolvent.

Flamed Diving

DishonestPikey wrote: »

No but we're in a better position now to become self sufficient. We're also a highly skilled nation as compared to 20 years ago.

the phrase "So long and thanks for all the fish" springs to mind.

Ireland could never be self-sufficient. Ever. Just drop that de Valerian notion from your mind.

Flamed Diving

UCD_Econ wrote: »

The purchasing power of your money hasn't fallen, you simply have less off it. A euro will still buy you the same thing whether you have 100 or 10. Controlling inflation is paramount to a monetary union.

If anything peoples purchasing power should be increasing with rate rises, in an international context, of course.

gurramok

And here you have it from the horses mouth at the ECB:
http://www.rte.ie/business/2008/0718/ecb.html

rte wrote:

Mr Trichet told the Irish Times that the ECB will not change the course of its monetary policy to assist those euro area members such as Ireland, Spain or Portugal that are currently experiencing economic difficulties.

'The ECB has to care for the superior interest of the euro area,' Mr Trichet said. 'Our monetary policy must be optimal at the level of the whole euro area - exactly like the US Fed would not look at what is in the interest of Missouri, California or Texas,' he added.

The only goal of the ECB is to ensure price stability in the medium term, Mr Trichet said. By anchoring inflation and curbing inflationary expectations, the ECB strategy underpins a financial environment favourable to job creation and sustainable economic growth.

Responsibility for solving specific economic problems confronting individual euro area members rests with national governments, parliaments and social partners, he said.

The eurozone's interest over-rides the individual national interest. Ireland, you reap what you sow

Flamed Diving

Thank you, Minister of the Bleedin' Obvious.

gurramok

Flamed Diving wrote: »

Thank you, Minister of the Bleedin' Obvious.

Fyi, alot of misguided people in this country have been calling for rate cuts to help Ireland through a recession.

Économiste Monétaire

Interest rates won't and should not be cut until there is a decrease in the HICP & MUICP.

The ECB has one main focus: Price stability. That supersedes everything else.

Flamed Diving

gurramok wrote: »

Fyi, alot of misguided people in this country have been calling for rate cuts to help Ireland through a recession.

And they are just that, misguided.

Flamed Diving

UCD_Econ wrote: »

The ECB has one main focus: Price stability. That supersedes everything else.

A lot of people seem to have trouble grasping this concept.

nesf

Flamed Diving wrote: »

A lot of people seem to have trouble grasping this concept.

I think it's the medium term outlook that they have the most trouble with. Most people have trouble imagining inflation as anything but the short term.

Flamed Diving

nesf wrote: »

I think it's the medium term outlook that they have the most trouble with. Most people have trouble imagining inflation as anything but the short term.

Yeah, but some people seem to hold the belief that the ECB is there to swoop to the rescue of any country that is in recession, when growth performance isn't their primary objective (nor is 'rescuing' individual countries). Rendering comments like:

The eurozone's interest over-rides the individual national interest. Ireland, you reap what you sow

...utterly pointless.

gurramok

Flamed Diving wrote: »

Yeah, but some people seem to hold the belief that the ECB is there to swoop to the rescue of any country that is in recession, when growth performance isn't their primary objective (nor is 'rescuing' individual countries). Rendering comments like:

...utterly pointless.

How is it pointless?

Point was that the 15 nation eurozone interest supercedes the individual national interest, it was agreeing with your sentiment!

Flamed Diving

Explain the 'ye reap what ye sow' comment then.

gurramok

It was a reference to when the country jumped into the euro head first without any planning for the housing bubble that was created when interest rates were slashed to suit the continental powers at the time which helped trading conditions as the euro was weak back then.

Now we have the situation that the rates are going up which does not suit Ireland especially when alot of our trade is with the UK\US with the euro too strong.

If we had stayed outside the euro and controlled our own rates, things would of been different.

Its a case of reap what you sow Ireland Inc but we cannot do anything about it and shouldn't. Lets take the short term pain for long term gain.

Flamed Diving

And you cannot see any benefit for Ireland with regards being part of a strong currency?




HINT: Iceland

nesf

Flamed Diving wrote: »

And you cannot see any benefit for Ireland with regards being part of a strong currency?




HINT: Iceland

Extra credit hint: Import elasticities.