European Central Bank Chief Economist Otmar Issing said a surge in oil prices may lead to higher-than- expected inflation in 2006, as the bank edges closer to raising interest rates for the first time in five years.
“Rising oil prices are not only affecting current inflation rates but they’re also overshadowing next year,” Issing said in an interview on Oct. 14 at a banking event in Frankfurt. “It can’t be ruled out that risks for price developments will deteriorate that much over the medium term that we might have to expect the annual inflation rate to slightly exceed 2 percent.”
The comments were the second in three days suggesting the bank may raise its inflation estimate of 1.9 percent for 2006. The bank projects the level this year at about 2.2 percent. ECB President Jean-Claude Trichet said at a briefing after the annual meeting of the Group of 20 industrial and developing near Beijing yesterday that he can’t exclude inflation being “over and above” the bank’s 2 percent ceiling.
My view: this very much depends on the evolution of oil prices. There is little evidence of any strong impact on ‘core prices’ at this point, there is plenty of evidence of growth weakness. There is thus little justification from a purely eurozone perspective for any short term increase in interest rates, and certainly no justification whatsoever in the case of Germany.
The euro fell to a nine-month low against the dollar after European Central Bank Chief Economist Otmar Issing spurred speculation the bank may reduce interest rates for the first time since 2003.
Asked in an interview with Germany’s Der Spiegel magazine whether investors’ expectations of a rate cut in coming months are justified, Issing said: “In the past, financial markets almost always anticipated ECB policy decisions correctly.”
“He is preparing investors for a rate cut and the market is responding to that by selling euros and buying dollars,” said Neil Jones, a director of foreign-exchange sales at BNP Paribas SA in London.
I hasten to add that I consider Otmar Issing to be perfectly authorised to steer the euro down in this way. This is a much more considered move than Jean-Claude Junker’s recent outburst. Basically I agree with it, I am just waiting to see whether Greenspan will in fact be able to continue raising US rates. If he does it once, I can’t see him continuing for long.
A right royal row is brewing at the ECB. Basically the old guard theorists of the ‘one size fits all’ monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray. Continue reading →