European Central Bank President Jean-Claude Trichet may talk tough on inflation, but there’s little reason you should believe him in the short-term, according to Societe Generale.
There are three reasons why the ECB has no interest in raising rates before the end of 2011, and there the same reasons why there won’t be any tightening measures put in place prior to the end of H1.
The reasons, from Societe Generale:
- The inflationary risk vs. sovereign debt crisis
- Imported inflation vs. weak wage growth
- Differences between Germany and the rest of the eurozone
The first is pretty clear. There’s no way the ECB can start an aggressive tightening programme when its still trying to deal with the problem on the eurozone’s fringe. In terms of inflation, much of it has been in food and commodities, meaning it’s imported and rate hikes can’t fix the problem, and may actually hurt when wage growth is timid. Finally, Germany’s reforms have given it an advantage in the eurozone, and the rest of the region needs to catch up.
So, while Trichet may do a lot of hawkish talking when the ECB makes its latest announcement at 7:45 AM ET today, don’t expect any action behind it.
All that being said, the apparent hawkishness of the ECB vs. our fed explains a lot currency-wise, so pay attention to EUR/USD to see how the market is interpreting the meeting.