The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 05, 2006

ECB On The Move

Claus Vistesen reports on the European Central Bank's decision to raise its overnight interest rate target by 25 basis points, and awaits "the hints we are given to the future course" of policy.  The hints have arrived.  From Bloomberg:

European Central Bank President Jean- Claude Trichet said more interest-rate increases may be needed to curb inflation after the bank raised its benchmark rate for the fifth time in 10 months today.

"The market has in mind further moves, I wouldn't say anything to correct this sentiment,'' said Trichet at a press conference in Paris after the central bank raised the refinancing rate to 3.25 percent from 3 percent. "It will remain warranted to further withdraw monetary accommodation'' should the economy progress as the ECB forecasts...

"The tone of Trichet's commentary at the ECB press conference remains hawkish,'' said David Brown, chief European economist at Bear Stearns International in London. "The suggestion of progressive further withdrawal of monetary accommodation implies that the ECB probably intends to extend its tightening cycle beyond December into next year.''

That opinion was certainly shared by others.  From the International Herald Tribune...

The ECB "clearly has a tightening bias and would like to raise rates to 4 percent," said Andreas Rees, an economist at HVB Group in Munich. "The question is whether the economic data will allow it to. We think growth will slow, and that will prevent the ECB from raising rates next year."

... from the Financial Times...

“We consider the ECB is following a normalisation process to bring the short-term rate close to a hypothetical ‘neutral’ level that could be estimated at between 3.5 to 4 per cent,” said Vincent van Esch, economist at ING Financial Markets.

... from the Wall Street Journal:

Commerzbank economist Michael Schubert said recent hawkish rhetoric from the ECB suggested it would "stick to its key message" that further gradual monetary tightening is still warranted.

Mystery solved.

October 5, 2006 in Europe | Permalink


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""It will remain warranted to further withdraw monetary accommodation'' should the economy progress as the ECB forecasts..."

This is the heart of the matter, will the economies of the key eurozone states continue to progress as the ECB is forecasting. There is plenty of reason to have doubts on that particular count. I retain my view, this is probably the end of the raising cycle (and indeed it may easily turn out to have been one bridge - at least - too far), by the time we get to December a lot of things will have changed.

Posted by: Edward Hugh | October 05, 2006 at 01:36 PM

Mark Cuban, entrepreneurial owner of the Dallas Mavaricks, just said on Neil Cavuto's Fox T.V. show: "There's so much money there's NO viable place to put it." Granted, Cuban's not a macro-Economist, but he has done pretty well assessing & acting on risks & opportunities within our economy.
It's a real shame we can't even agree on how to define money. Maybe this is a job for the Fed?

Posted by: bailey | October 05, 2006 at 05:09 PM

"This is the heart of the matter, will the economies of the key eurozone states continue to progress as the ECB is forecasting."

The problem, in Europe, is that inflation rates vary highly from one country to another. It is not at all like the US where inflation is fairly uniform from region to region.

So, Trichet's job is made more difficult. At the moment, it appears that raising interest rates does not seem to have diminished France's ability to create jobs recently - a fact which has been unseen for the past five years. However, it is certainly not helping in the least in Germany towards stimulating job creation. But, as regards the latter, there is no indication whatsoever that lower interest rates would have any consequence in stimulating consumer demand, so despondent is the average German after decades of around 10% unemployment.

It is unwise to think that central bank policies that work stateside work in Europe in quite the same way. However, there is one thing that seems to have been understood by Trichet that holds true across the Atlantic.

Talking to reporters in order to influence financial markets is a Greenspan trademark.

Posted by: Lafayette | October 06, 2006 at 01:29 PM

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