ECB [European Central Bank]p repares rate rise as global tide turns

The Telegraph ^ | 3/4/2011 | Ambrose Evans-Pritchard

[bruinbirdman]

The European Central Bank has surprised markets by signalling a rate rise as soon as next month, brushing aside warnings that this may compound damage from the oil shock and push EMU debtor states deeper into crisis.

"We are in a posture of strong vigilance: an increase in interest rates at the next meeting is possible," said ECB president Jean-Claude Trichet, following a meeting of the governing council. The code word "vigilance" sent the euro rocketing to almost $1.40 against the dollar.

The ECB is the first of the big central banks to signal a rate rise to curb inflation, marking a major turning point in the global policy cycle.

"This is a shock," said Silvio Peruzzo from RBS. "This raises risks for the eurozone periphery through all kinds of channels. Most mortgages in Spain are on floating rates."

Santiago Carbó from Granada University said the shift was "very worrying" for Spain. "It catches us at a bad time: we haven't finished cleaning up the financial system."

Mr Trichet said the ECB aims to stop inflation psychology gaining a foothold, though he played down fears of a "series" of rate rises. As a concession, the ECB once again extended its unlimited 3-month liquidity for "addicted" Irish, Greek, and Iberian banks.

The ECB is starkly at odds with the Federal Reserve on the impact of surging oil and food prices. Fed chair Ben Bernanke said this week that inflation spill-over is likely to be "temporary and relatively modest". The Fed view is that commodity shocks drain demand in the wider economy, acting as a deflationary tax.

The ECB's task is hugely complicated by the widening North-South split and incipient wage inflation in Germany. Jörg Krämer from Commerzbank said the ECB's 1pc rate is "far too low" for booming

[Crucial]

This doesn’t look good. It seems that they may have no choice but to raise rates.

[Jumper]

Rasing rates raises money from those who need to borrow, creating wealth.... When rates are low, taxes alone are not enough!

[RegulatorCountry]

The EU rate hike does not occur in a vaccum. They’ve had difficulty grasping the import of their actions upon their currency all along. I recall their crowing about a strong currency, only to belatedly realize that it put exports at a distinct disadvantage. Much of their manufacturing relies upon export. Many of the EU member nations are in dire straits economically. Looks like the Germans, and to a lesser extent the French, have won out for now. Time will tell, whether this bodes well for the EU or not. I’m going to say not. Maybe for Germany, but it’ll send Ireland, Portugal, Greece and Spain completely over the edge. They were in a very tenuous situation before this.