Jun 14, 2005

European Interest Rates

From the FT:
Hints by Jean-Claude Trichet, ECB president, and Otmar Issing, the bank's chief economist, that the possibility had increased of borrowing costs falling have contrasted with comments by several national central bank governors on the committee.
The differences highlight the dilemma faced by the ECB. Economic growth, lacklustre for the past four years, has slowed again, and politicians are increasing the pressure for a further cut in borrowing costs. But excess liquidity and oil price increases are sounding inflationary alarm bells.
The confusion puts pressure on the ECB to clarify its stance at its next rate setting meeting on July 7.
I wrote last week that I doubt U.S. interest rates will plunge like Japanese rates did in the 90's. I am much less convinced that the same can be said for Europe. The U.S. is in a much more attractive position to prevent deflation because lowering U.S. interest rates mostly punishes foreign lenders. Europe's higher savings rates make the ECB's decision tougher. In the end I think they will cut rates (maybe this fall) and I am guessing it will happen while the euro is rising rather than falling. I would also expect the ECB to follow any rate cuts by the U.S. Fed this time around too.
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