That ECB trial balloon concerning a possible interest rate increase -- as opposed to an interest rate cut -- may end up being more than just a trial balloon, if Europe's inflation ramps up.
A day after ECB officials signaled that interest rates may have to rise to stem above-expectation inflation on the continent, Europe's service sector growth unexpectedly accelerated in April 2008, Bloomberg News reported Wednesday, suggesting that economic activity may be stronger than initial 2008 euro-zone forecasts.
Europe's service sector index as measured by the Royal Bank of Scotland, which includes a wide swath of industries from airline to financial services, rose to 51.8 in April 2008 from 51.6 in March 2008, Bloomberg News reported. A reading above 50 indicates expansion.
London-based economist Mark Chandler told BloggingStocks Wednesday that the unanticipated growth, combined with other positive factors, should forestall any ECB rate cut in the near future, but will not necessarily lead to an outright rate increase.
"Right now there still are a number of positives that suggest continued euro-zone growth. Employment growth is good, wage growth is adequate, and business-to-business spending is holding up fairly well," Chandler said. "That suggests adequate growth heading into the third quarter, and when you add rising inflation, it's a different economic picture than what you're seeing in America right now."
ECB prediction
Still, Chandler doesn't expect the ECB to increase rates in Q2, unless "we get a really bad read on inflation next month." He said doing so would set the ECB up for criticism that it's not assisting the recovery of the U.S. [most likely in recession] and U.K. [possibly heading toward recession] economies. Each has been harder hit -- so far -- by the end of the housing boom and the rise in mortgage defaults.
"Even though we're looking at about 3% annual inflation for Europe, an interest rate increase here would be viewed in many circles as hurting regional and global economic conditions," Chandler said. "I don't think that's the image the ECB wants to project. It's a bit of a burden because inflation is rising, but for now the ECB will have to hold its fire."
Finally, as Chandler noted earlier this month, one benefit of a more hawkish-ECB is that, from an interest rate standpoint, "it keeps one central bank in reserve, if the global slowdown gets worse." The U.S. Federal Reserve and the Bank of England are already in stimulation mode, the ECB is not, and it could provide "that second wave of interest rate cuts" if the slowdown in business activity broadens/deepens, he said.
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Reader Comments (Page 1 of 1)
4-23-2008 @ 3:34PM
B. Harrison said...
Just a thought: For every action, there is a reaction . . . often an unexpected reactions, over corrections, etc.
What if the Fed establishes an interest rate to provide parity for both the investors and the borrowers, and then let the market seek its own level. This would require some "common sense" level of reasonable regulation to maintain the integrity of the corporate operations; however, in the long run, would this not provide long term stability without these violent upheavels. This would not restrict the ability to gain wealth through the stock market or other investments; and it would somewhat limit the losses to what an individual/corporation could afford.
Any merit to this?