The European Central Bank, concerned over soaring inflation, raised its benchmark rate to a 7-year high of 4.25%. This will likely put more pressure on the Euro economy, exacerbating the global slowdown. Bloomberg:
Policy makers say they’re worried that the fastest inflation in 16 years will develop into a wage-price spiral as workers demand more pay to compensate for rising costs. The risk is that higher interest rates deepen Europe’s economic downturn. France and Spain have already said the ECB may not be paying enough attention to the growth outlook.
“The inflation outlook has deteriorated significantly in the past month,” said Klaus Baader, chief European economist at Merrill Lynch and Co. in London. ECB President Jean-Claude Trichet will “leave the door open” for further action.
It’s refreshing to see that at least one central bank still understands that it’s role is to protect wealth, not try to micromanage the business cycle. Alas, it won’t help the economy.