October consumer prices inflation report added some new troubles for ECB to worry about as the released 2.6% CPI growth last month exceeded ECB’s target of 2.0%, while the economy growth is not performing at the pace that would allow another rate hike soon.
Until September 2007 ECB had fought inflation with some success – CPI didn’t grow faster than 1.9% – that means that recent interest rates hikes did what they were supposed to do. But September’s CPI growth at 2.1%, October’s 2.6% and expected 3.0% for November call for another increase of the interest rates as soon as possible. Rising oil and food prices contributed a large part to the higher inflation with more than 70% growth on both oil and wheat since the beginning of 2007. But the problem is that even a core CPI (without energy and food prices) grew by 2.1% in October.
But ECB can’t hurry with the rates hike for two reasons – first, higher interest rate on holding the euro will trigger faster currency appreciation, which is already high enough and is hurting European exporters; second, GDP numbers for the 2007 Q3 aren’t very optimistic – 2.6% against 2.9% last year. Combined with a kind of financial crisis which hit many European banks, these factors may outweigh the CPI data and ECB will decide to wait this time.
If you have any questions, comments or opinions regarding the Euro,
feel free to post them using the commentary form below.
