Jean Claude Trichet hinted last week that an ECB rate hike could be imminent.
Unlike our Fed, which really focuses on “core” inflation, the ECB gets twitchy about everything.
But look again at where this inflation is coming from. It’s energy, as the below chart from Morgan Stanley shows nicely. Food is part of it, but it’s not that dramatic. Unless you think that the ECB raising rates will do something about the price of oil — lately something that has been driven by turmoil in the Mideast — this can only be characterised as a massive policy blunder, like what Bernanke talked about in his old paper.
Meanwhile, if the ECB does ultimately go through with the hikes it could end up being Euro bearish — as pointed out last week by BofA FX strategist Athanasios Vamvakidis — if it simply raises problems for the periphery.
Photo: Morgan Stanley