The Euro touched 1.45 but we have yet to hear a word of caution from the European Central Bank. Why? The answer is simple, inflation. Consumer prices in the month October jumped to a 2 year high of 2.6 percent, well above the central bank’s 2 percent target. Maintaining price stability has long been one of the ECB top priorities
Today’s CPI data illustrates the degree of price pressure that the Eurozone economy currently faces. The ECB needs a strong Euro to bring down inflation which is why they have not shown any major concern about the level of the currency. In fact, they could even be seriously considering raising interest rates. Yesterday, the central bank of Sweden raised rates by 25bp. Like the ECB, they were worried about growth and the impact of the global market turmoil, but at the same time inflationary pressures were such a concern that they opted to raise rates to the highest level in nearly 5 years. The ECB faces the same predicament and given the decision by Sweden, we would not be surprised to see a hike from the ECB as well. At bare minimum however, monetary policy will remain hawkish for the remainder of the year.