James Saft

ECB set for an error for the ages

Mar 29, 2011 11:45 UTC

In a field of endeavor with a long and glorious history of folly, the European Central Bank is preparing to commit an error for the ages: hike interest rates into the face of a crisis of existence for the euro zone.

There is an increasing likelihood that when the ECB meets  on April 7 they will respond to surging energy costs and 2.4 percent annual inflation – the highest since 2008 – by raising interest rates, probably by a quarter of a percent.

“Inflation rates … are now durably above the common definition of price stability in the euro zone,” ECB President Jean-Claude Trichet told an audience in Paris on Monday.

This reinforced expectations of a hike he introduced in early March when he dropped the words “strong vigilance” into remarks following the last interest rate-setting meeting, a phrase that served as a one month warning of rate hikes to come during the 2005-2007 rate hike campaign.

Reports that the ECB is preparing a new bail-out lending vehicle for Irish banks, taken as a precursor to a wider effort at bank relief, are being read in markets as further evidence that the ECB is ready to tighten. The reasoning is that, having squared away the banks, and their mutually dependent sovereign guarantors, nothing will stand in the way of an old fashioned bout of inflation scourging.

No jam today or tomorrow for Britain

Feb 17, 2011 12:46 UTC

Poor Mervyn King — damned if he doesn’t raise interest rates, futile if he does.

The Bank of England governor is in the unenviable position of having to steer interest rate policy during a period when living standards are being battered, his inflation target is being mocked by even small boys in the street and there is no obvious course of policy which can reconcile the two problems.

The BOE on Wednesday released its quarterly inflation report which judged the chances to be about equal of inflation being above or below its 2 percent target in two years’ time, this despite predicting that it will spike above its current 4 percent rate in the near term.