As you probably know, central bankers have a tendency to talk in code. And yesterday it was the European Central Bank’s turn.
As expected, and predicted here yesterday, the ECB upped the rate of interest. This will not endear its President Jean-Claude Trichet to certain European politicians, Mr Sarkozy, for example, but then the ECB’s top man has made it clear he is worried about inflation.
He had even warned it could “explode,” if the ECB did not take action.
Well, yesterday he took that action, and the Eurozone rate of interest is now 4.25 per cent, just ¾ per cent shy of the British rate.
But the key this time was in what Mr Trichet did not say. For Mr Trichet did not utter the words ”in a state of heightened alertness.” And that was enough to leave commentators saying the ECB has had enough, its run of increasing rates is over.
Jennifer McKeown, at Capital Economics said: “the marked slowdown in economic activity that is already underway should ensure that wages growth remains well-contained and headline inflation starts to ease back later this year. As a result, not only do we think that today’s hike will be a one-off, but we see interest rates falling to around 3.0 per cent by the end of 2009. This profile is still far weaker than that priced in by the markets, suggesting scope for bond yields and the euro to fall back further.”
But on the other hand, perhaps the single biggest reason why inflation is not expected to develop into an upward spiral in the UK and US does not apply to the Eurozone.
Trade union reform in the early 1980s has led to a labour market here and across the pond that is flexible, and far less likely to enforce inflationary wage rises. It is far from certain this argument applies to the Eurozone.
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