The financial markets are finally waking up to the possibility of an interest rate hike by the European Central Bank.
Although a rate hike has not been priced in for this week’s monetary policy meeting, there is a growing possibility that ECB President Trichet could notch up his degree of hawkishness by bringing back the words “strong vigilance.” We have been talking about this scenario for weeks and relating the ECB decision to the recent decision by the central bank of Sweden to increase interest rates. Inflation has become a major problem with the annualized pace of consumer price growth jumping to 2.6 percent, well above the ECB’s 2 percent inflation forecast. If the Reserve Bank of Australia raises interest rates tomorrow night, it will be further evidence that major central banks are not afraid to increase interest rates in the current market environment. There was no Eurozone economic data released this morning, but service sector PMI, PPI and retail sales are due for release tomorrow. We are expecting stronger inflation numbers, decent retail sales and stable service activity.