He might, if sentiment against the ECB inflation target continues to mount. Bloomberg News Tuesday quoted London-based Morgan Stanley co-chief economist Joachim Fels as concluding that the ECB's goal of lowering inflation below 2% as unachievable and not credible. "The ECB's keeping up a fiction," Fels said, adding that the ECB should adjust the target.
As part of an effort to jump-start a U.S. economy slowed to a crawl by the nation's worst housing recession in more than 15 years, and to prevent a global economic slowdown, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% in the past year. Further, to stave off a potential regional and global slowdown, the Bank of England has cut its key rate three times to 5%.
Meanwhile, the ECB has kept its key rate the same, at 4%. Throughout the Fed's and the BOE's easing, Trichet has repeatedly underscored the risk to the euro-zone economy from rising inflation. Europe, like the U.S, is feeling the effects of record-high oil prices, with euro-zone inflation increasing to about a 3.6% annualized rate in March 2008.
Further, as long as the prospects for adequate euro-zone GDP growth remained good, Trichet was able to virtually ignore pleas that he lower rates to further-safeguard Europe against the U.S. economic downturn. However, recent evidence of slowing growth in Italy and Spain, and a contraction in Portugal in Q1 2008, has shifted the inflation/recession scales toward greater concern about a recession.
Economic Analysis: Not to belittle the burdens on the Fed, but the ECB is likely to face its own monetary policy dilemma in Q2/Q3 2008. Germany's GDP appears to be sufficient (for now), while signs of an economic slowdown appear to be underway in the outer euro-zone. That sets up a potential 'two-tier' euro-zone economy in which the outer states push for interest rate cuts while Germany pushes for a stand-pat stance to check inflation. The bottom line? While one should never underestimate the ability of Trichet to delay a rate, look for the ECB to lower rates in Q3 2008 unless euro-zone inflation accelerates further.
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