There is no doubt that the European Central Bank remains extremely hawkish, especially as estimates for Euro-zone CPI have rocketed to a fresh 16-year high of 4.0%. As a result, the markets are widely expecting the ECB to increase interest rates by 25bps to 4.25% on Thursday, marking the first hike since last summer, but given recent commentary, there are indications that this may be a one-and-done deal. Nevertheless, government leaders are staunchly against any sort of rate increase, as restrictive monetary policy threatens to slow expansion in their respective economies to a crawl.
ECB: Are They About to Become the Most Hawkish (and Unpopular) Central Bank Around?
There is no doubt that the European Central Bank remains extremely hawkish, especially as estimates for Euro-zone CPI have rocketed to a fresh 16-year high of 4.0%. As a result, the markets are widely expecting the ECB to increase interest rates by 25bps to 4.25% on Thursday, marking the first hike since last summer, but given recent commentary, there are indications that this may be a one-and-done deal.
Jean-Claude Trichet, European Central Bank President
“Central banks can’t control relative prices, but [we] are responsible for price stability over the medium term.” – June 27, 2008
Miguel Angel Fernandez Ordonez, European Central Bank Governing Council Member
“The only thing we said refers to the next meeting. We made that crystal clear, many of us clarified that when people thought we were starting a rate hike (series)…There is nothing inevitable in life. What we said is, the increase is not certain, but is possible.” – June 27, 2008
Nevertheless, government leaders are staunchly against any sort of rate increase, as restrictive monetary policy threatens to slow expansion in their respective economies to a crawl.
Nicolas Sarkozy, French President
“The ECB, whose independence should be preserved, should ask itself some questions about economic growth in Europe and not just inflation. Inflation today is due to the boom in (prices of) raw materials. You can’t tell me that in order to fight against inflation you have to raise interest rates. You can double, triple interest rates and that will not bring a decrease in the price of a barrel of Brent.” – June 30, 2008
Peer Steinbrueck, German Finance Minister
“The ECB should take into account the consequences of an interest rate hike…Inflation is a problem. I’m afraid inflation will occupy us more then the financial market crisis currently does. But there is no short-term solution…Economic growth will this year at least reach the forecasts published by the federal government early this year.” – July 1, 2008
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BOE: Weighing the Risks to Growth vs. Inflation
While price stability remains a major priority for the Bank of England, which they says is “a precondition for achieving a wider economic goal of sustainable growth and employment,” it is clear in commentary by various MPC members that they are not yet ready to combat inflation with rate increases. However, the central bank will likely continue to issue hawkish commentary, in the hopes that they can contain the public’s already-growing inflation expectations.[/B]
Mervyn King, Bank of England Governor
“The economic slowdown will need to be sufficient to ensure that inflation does not persist above the target…But at the same time, we need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below…Over the rest of the year, the impact of these changes will continue to pass through the supply chain to household bills and consumer prices. The MPC’s current judgment is that inflation is likely to rise to above 4 percent before the end of the year, although this projection is very sensitive to the path of domestic gas and electricity prices.” – June 26, 2008
John Gieve, Bank of England Deputy Governor
“Most measures of inflation expectations especially in the short run have moved up. While wage increases have generally remained flat so far, there have been increased risks both of an upward shift in wage and price expectations and of a loss of public and market confidence in our determination to bring inflation back to target…. The current conjuncture is the most difficult the MPC has had to face.” – June 26, 2008
Tim Besley, Bank of England Monetary Policy Committee Member
“In the wake of the financial market turbulence, I supported two of the quarter point cuts in Bank Rate that the MPC has implemented since last August…However, I did not support the quarter point reduction in April when I voted in a minority against the cut in Bank Rate. I felt that we needed more time to assess the severity of the inflationary pressures that we were facing and whether the economy was slowing in line with previous projections.” – June 26, 2008
“In the coming months, we will need to convince wage and price setters through word and deed that the increases in inflation that we foresee will only be temporary. Conveying this message in a credible way may reduce the need for more activist monetary policy in future and create a smoother adjustment path to the shocks that are experiencing. I am open-minded about the path of Bank Rate that will be needed to maintain the inflation target in the medium term and I will form a judgment depending on how the data evolves in the coming months.” – June 26, 2008
Kate Barker, Bank of England Monetary Policy Committee Member
“Financial market conditions have recently eased slightly, partly due to the introduction of the Special Liquidity Scheme, although the adverse impact of the credit crunch has become more apparent with sharp deterioration in the housing market. However, with global demand remaining robust overall, and oil and food price rises pushing up public inflation expectations, the upside risks to inflation over the medium-term have also worsened.” – June 26, 2008
Compiled by Terri Belkas, Currency Analyst for DailyFX.com
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