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Home > Blogs > Anthony Harrington > Trichet and the ECB hint at rate rises

Trichet and the ECB hint at rate rises

Quantitative easing | Trichet and the ECB hint at rate rises Anthony Harrington

The broad hint given by Jean-Claude Trichet, President of the European Central Bank, during the ECB’s monthly press conference on March 3, that the Bank was actively considering a rate hike in the short term, has prompted astonishment from fund managers and economists. There is no doubt that the ECB’s comments will also be very unhelpful to the Governor of the Bank of England, Mervyn King, who is trying to contain the hawks on the Monetary Policy Committee who are also pushing for a UK rate rise to contain inflation, currently nudging 5%.

The ECB tends to speak in code. It doesn’t come straight out and say: “We’re thinking of raising rates.”  What it says instead is this:

“...The information which has become available since our meeting on February 3 2011 indicates a rise in inflation, largely reflecting higher commodity prices. The economic analysis indicates that risks to the outlook for price developments are on the upside, while the underlying pace of monetary expansion remains moderate. Recent economic data confirm that the underlying momentum of economic activity in the euro area remains positive; however, uncertainty remains elevated. The current very accommodative stance of monetary policy lends considerable support to economic activity. It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term. Strong vigilance is warranted with a view to containing upside risks to price stability. Overall, the Governing Council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialise. The continued firm anchoring of inflation expectations is of the essence.”

What is so surprising about Trichet’s comments, of course, is the fact that Greece and Ireland are far from resolved issues. Both are facing interest repayments on their debt that are unsustainable on a three to five year time frame. The incoming Irish Government was elected with a mandate to renegotiate the terms of the bailout agreed to by its predecessor. Ireland’s Fine Gael leader, Enda Kenny is the Taoiseach elect and his Labour coalition partner Eamon Gilmore becomes Tanaiste. The two are likely to push for an early meeting with the EU which could prove extremely problematic and could catapult the Irish crisis back into the headlines big time.

However, be that as it may, the point made to me recently by Chris Hills, chief investment officer at Rensburg Sheppards, was that it is a sign of how far the European sovereign debt problem has slipped out of public consciousness that the ECB can talk in a fairly relaxed way about raising rates. “You wouldn’t do this if you thought that Greece, Portugal and Ireland were in a death spiral,” he commented. Another fund manager, Callum D’Ath, a Director at wealth managers Brewin Dolphin, and a staunch supporter of Mervyn King’s refusal to raise UK base rates, points out that the ECB is next to obsessive about price stability and has definite form for extremely poor timing when it comes to rate rises. “Trichet was the man in charge when the ECB famously put up rates just weeks before the demise of Lehman Brothers in September 2008. They completely missed the biggest deflationary event in the last 75 years,” he says.

Adrian van Tiggelen, senior investment specialist at ING argues that it is actually extremely difficult, even for the world’s top central bankers, to strike the right balance just at present between the twin evils of encouraging inflation with too much loose money, or precipitating a double dip recession by overdoing fiscal tightening and austerity. “There is a real risk that the Federal Reserve is behind the curve in keeping interest rates so low for so long. But on the other side, there is also a real risk that the ECB might end up being too hawkish, particularly since the problems in the Spanish banking sector are very considerable – not to mention Ireland or Greece.” However, van Tigglen argues that the market is already pricing in an anticipated 2.5% worth of rate hikes from the ECB running through the course of 2012. In many ways, he says, it would not be a bad thing if central banks could manage to raise rates and replenish their “toolbox”.  When central banks are sitting on near zero rates there is very little they can do to fight a downturn except print money. At least getting a few percent on the books would give them something to cut if there was a need to stimulate any flagging in the economy.

The comments from fund managers in this blog were made during interviews for a wealth management supplement due to appear in The Scotsman on March 16.

Further reading on quantitative easing and inflation:

Tags: ECB , European Central Bank , fiscal stimulus , inflation , Jean-Claude Trichet , price stability , rate rise
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