The European Central Bank must be pretty serious about raising interest rates if they decided to hold a surprise press conference on what was originally scheduled to be nothing more than obligatory monetary policy meeting conducted over teleconference. Without giving any clues on how much further they plan on raising interest rates, the whole point of the meeting was for Trichet to say the words “strong vigilance,” which have been code for “expect an interest rate hike next month.”
Despite indications of slower growth in the Eurozone, the recent rise in oil prices, emerging capacity constraints and the potential for stronger wages were apparently too much for the ECB to handle. However the initial reaction in the Euro was limited because Trichet refused to say that monetary policy remained accommodative. Although other ECB officials echoed the concern about inflationary pressures, they also talked about the impact that the strong Euro is having on exporters. BMW reported a 4.6 percent drop in earnings in the second quarter despite an 8.6 percent rise in sales. Part of that was because of the higher costs of raw materials, but the company also indicated that currency effects “are having a greater impact on earnings than previously forecast.” The ECB is being cautious, but their continued plans to raise interest rates in the current environment has analysts still calling for 2 rate hikes by the end of the year, one in September and one in December. Meanwhile Swiss manufacturing PMI was stronger than expected last month. Growth in general has been strong, which is why we expect the SNB to remain hawkish.