Tomorrow, the European Central Bank meets to discuss what to do about the new emerging threat in the eurozone: inflation.
Inflation has blown passed the upper limit of the ECB’s target, to 2.2%. And while the bank might like to turn all hawkish on its rise, by raising rates and curtailing liquidity measures, that’s an unlikely outcome.
The reason: that other crisis that’s still happening in the background.
From Societe Generale:
The trouble is that with no new policy initiatives on the horizon, the euro area’s sovereign debt crisis just quietly continues to bubble away in the background; nothing has been solved and the problems just continue to fester. Every time the ECB stands back from the market, peripheral bond yields creep up again.
Meanwhile, the banking sector in the peripheral economies, especially in Ireland, remains heavily dependent on the ECB. This may yet prove to be the main channel through which the crisis continues to propagate.
So while Jean-Claude Trichet has been indicating a desire to pull back from market support mechanisms, it may not be a real possibility. Right now his request that the eurozone’s political leaders get together to focus on their “Economic Union” is falling on deaf ears, so don’t expect Trichet to fire off a rate hike or reduce the ECB’s liquidity measures tomorrow or anytime before the end of 2011, according to SocGen.