Rates to go up, inflation to stay up
Jean-Claude Trichet reconfirmed yesterday that the ECB will raise interest rates at its next meeting, repeating his words from last time that such a move was probable. Speaking in front of the European Parliament’s Economic and Monetary Affairs Committee, Trichet said that inflation will remain high throughout this year, and will only fall slowly in 2009, Frankfurter Allgemeine reports. The ECB also remains wary about second-round effects, and Trichet said there was particular concern that the prolonged increase in headline inflation rates would alter inflationary expectations of households. A potentially interesting comment was that he did not explicitly rule out further interest rate increases. When prompted on this issue, he merely said that there have been no discussions on further interest rate rises.
The Fed fights inflation with words
Contrast the ECB’s stance with that of the Fed, which left its 2% Fed Funds target rate unchanged yesterday, and which gave no hint of an imminent rate rise. In its statement, the Fed, however, noted that the rise in the price of oil and other commodities have increased the risk of higher inflation. (We find it interesting that the Fed appears to believe that oil and commodities are the underlying causes for the rise inflation, while the ECB does not). The Fed said the US economy was still not in a recession, but expanding at a slow pace, according to Frankfurter Allgemeine. Risks to economic growth remain, but are reduced. There was one dissenting voice on the board, that of Texas Fed governor Richard Fisher.
Spain’s public finance are fast deteriorating
El Pais leads its economic section with a story about the rapid deterioration of Spain’s public finances. The Commission predicts that Spain’s budget surplus will disappear next year, as the economy slows, and Pedro Solbes, finance minister, yesterday told the parliament that a deficit cannot be excluded if growth were to fall further. Over the long-term, the Commission’s main concern is the quality of Spain’s public finances, rather than a deficit overshoot.
Low expectations about the French presidency
The French are pessimistic about Europe, reports Le Monde. Only 39% of the French believe that the French presidency could change the course for the better. The three “No” votes have disenchanted the people, comments the French Commissioner Jacques Barrot. The Irish ‘NO” vote has inclined the French government to raise social policy as a fifth objective one week ahead of the French presidency. The objective is to lift the persistent doubts in public opinion about the social reality in Europe.
No sympathies for Ireland in France
There is an interesting poll in Liberation, as retold by Jean Quatremer, according to which 24% of the French want to drop the Lisbon Treaty, 44% want to the Irish to vote again, and 26% favour implementation of the Treaty without the Irish. Which means that the present strategy of Merkel and Sarkokzy- to press for a second referendum, and failing that, to isolate the Irish - has a lot of support in the population.
German banking sector continues to consolidate
Two of Germany’s largest mutual banks, DZ Bank and WGZ bank are planning a merger according to Financial Times Deutschland, to create Germany’s third largest bank. We are going to spare you the details. The interesting aspect is that the long forecast consolidation of the German banking sector has now reached a sector that has proved most resistant to change. Other banks currently being sold are Postbank and the German network of Citibank. DZ and WGZ are owned by Germany’s Volks- und Raiffeisenbanken, mostly small regional mutual institutions.
Germany makes yet another retrograde step in corporate governance
The German Bundestag’s finance committee yesterday approved a law which will make it even more difficult for financial investors in Germany to pursue their interests. The new law will strengthen the incumbent management and the works council against investors who are ganging up to prevent or force changes. The trigger for this change of rules was Deutsche Borse attempt to buy the London Stock Exchange, which was blocked by some hedge funds. The committee also approved new rules to encourage venture capital finance, providing some tax relief for investors. See Frankfurter Allgemeine for more.
Greece is revising 2008 budget
The Greek finance ministry wants to tighten its budget expenditures in an attempt to meet 2008 goals threatened by lower-than-expected revenues , reports Kathemerini. Concerns are growing that Greece may miss its deficit objective of 1.6% for 2008 as the economy is starting to slow down. Economic growth has been revised downwards from 4% to 3.6% and the revenues in the first 5 months of an annualized 5.3% have fallen short of the 12.5% target. New budget goals and revised targets are likely to be announced in September.
Credit crisis: forth wave
We reported yesterday on the rapid rise in European credit spreads, which has prompted the Calculated Risk blog to ask the question whether this is the forth wave of the credit crisis (this is from a money market viewpoint: The three previous waves were period during which spreads peaked). CR pointed out that the TED spread – the difference between 3-month Libor and 3-month Treasury Notes – has gone over 100bp. The spread was higher during previous peaks, but the trend is upwards.
Why central bank transparency is a thoroughly bad idea
Ellen E. Meade and David Stasavage have an interesting article in Vox about negative effects of central bank transparency. Analysis of FOMC transcripts before and after Committee members knew that they would be published shows how transparency deadened the debate and reduced the number of challenges to Greenspan’s position.
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