What did Yves Mersh say?

By: Wolfgang Munchau

The euro fell by 2 cents on comments from one of the ECB's most obscure council members, Yves Mersh, who presents Luxembourg. Mr Mersh is normally considered to be a hardliner, but has now said that inflation risks may be contained. So everybody seems to be taking this as a signal that some shift is taking place.

 

In my view, that would be an overinterpretation - though the comments suggests that there may not be a sufficient majority for a rate rise if even Mr Mersh has his doubts. There remain different views on the ECB's board about the inflation dynamics. The two German representatives, Axel Weber, president of the Bundesbank, and Jurgen Stark, a member of the ECB's directorate, have both argued that there is a clear and present danger of second round effects. There are already some indications of that happening - wage indexing in France, or a rise in wage claims in Germany. Of course, a very sharp economic slowdown would take care of inflationary pressures in the short run, but only for as long as this slowdown persists. In the economy remains robust, inflation pressures might well get worse. Over the last few weeks the outlook to global economic growth has deteriorated, as the US is now probably on the bring of a recession (it may have already started). But don't make too much out of it. The ECB is at this point just as likely to raise rates than to cut them. My bet is that it will sit on 4% for a long time, until and unless there is a clear evidence that inflation is coming down.

 

 

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