Trichet to the Fed

Le message est clair.

Le Fed pète plus haut de son cul.

(with a tip of the hat to the Irish gnome in Zurich for the pic).


Trichet Says ECB May Consider Raising Rates in July

June 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said officials may raise interest rates next month to combat the fastest inflation in 16 years, sparking a surge in the euro and pushing bond yields to the highest level since 2001.

``It's not excluded that, after having carefully examined the situation, that we could decide to move our rates by a small amount at our next meeting,'' Trichet said at a press conference in Frankfurt after the ECB left its benchmark rate at 4 percent. ``I don't say it's certain. I said it's possible.''

Trichet's remarks, coming two days after Federal Reserve Chairman Ben S. Bernanke stepped up his own inflation-fighting rhetoric, suggest central bankers are now more worried about spiraling prices than faltering economic growth. Euro-region inflation, which the ECB aims to keep below 2 percent, accelerated to 3.6 percent in May and Trichet said policy makers are watching it with ``heightened alertness.''

``This is the clearest signal we're going to get'' from the ECB, said Dario Perkins, an economist at ABN Amro Holding NV in London. ``It looks like an interest-rate hike is imminent. We're now looking for data to prevent a rate hike rather than for something that would allow them to raise rates.''

The euro, which was down about 0.5 percent before Trichet's comments, jumped almost two cents to $1.5564. The yield on the German two-year bond rose 28 basis points to 4.61 percent by 3:54 p.m. in London, the highest since May 2001. The Dow Jones Stoxx 600 Index shed 0.2 percent to 316.31, reversing earlier gains of as much as 0.5 percent.

`Quite Shocked'

``I'm quite shocked,'' said Steven Bell, chief economist at hedge fund GLC Ltd. in London and a former U.K. Treasury official.

Policy makers ``noted that risks to price stability over the medium term have increased further,'' Trichet said. Unlike the Fed, which must control prices and boost employment, the ECB's primary mandate is to target inflation.

Expectations for rate increases as measured by Eonia swap contracts jumped and show investors have now fully priced in at least two quarter-point rate increases from the ECB by the end of the year.

Central banks have spent the past nine months combating a global credit squeeze that still threatens to push the U.S. economy into a recession. The Bank of England, which has reduced borrowing costs three times since December, today kept its main rate at 5 percent for a second month.

The ECB abandoned a planned rate increase last year and the Fed has slashed its benchmark rate by 3.25 percentage points since September, taking it to 2 percent.

Shifting Stance

Now they're shifting their stance as demand from China and other emerging economies drive oil and food prices higher. Bernanke said June 3 that policy makers are ``attentive'' to the impact of the falling dollar on inflation expectations. Bank of England Governor Mervyn King on May 14 said policy makers' priority must be to get inflation back under control.

The ECB today predicted prices would rise by about 3.4 percent this year and 2.4 percent in 2009. Its previous estimates, published in March, were for 2.9 percent and 2.1 percent. The International Monetary Fund says inflation in advanced economies will be the strongest since 1995 this year.

Trichet said the ECB's shift was aimed ``to secure the solid anchoring of inflation expectations.'' The so-called breakeven rate on five-year French inflation-linked notes has jumped in the past two months, climbing to 2.39 percent from 2.19 percent in April.

`Tough Situation'

``Every central bank is now looking at commodity and energy prices with increased concern,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former senior economist in Congress. ``They want to prepare people that, if this continues, they may have to raise rates. It is a tough situation for everyone as economies are still struggling.''

Europe's economy is showing signs of slowing as a stronger euro makes exports less competitive and consumer spending is damped by record oil prices and higher credit costs.

While Trichet said today that the economy is still ``sound,'' manufacturing and service industries barely expanded in May and retail sales suffered the biggest annual decline in April since records began. German manufacturing orders unexpectedly declined for a fifth month in April, the government said today.

The price of oil has surged 87 percent in the past year, climbing to $135.09 per barrel on May 22. The euro has increased 14 percent in the same period, rising to as high as $1.6019 in April.

Weber Wins Support

``I disagree completely that growth is sufficiently robust and I think they are severely underestimating risks to growth,'' said Marco Annunziata, chief global economist at Unicredit Markets and Investment Banking in London.

Trichet's remarks suggest Bundesbank President Axel Weber, one of the ECB's toughest inflation-fighters, is winning supporters on the bank's 21-member Governing Council. Weber in January dismissed speculation of a rate cut as ``wishful thinking'' and last month called for the bank to consider raising rates at today's meeting.

The ECB ``will follow words with action,'' Weber told ARD German television after Trichet's comments today. ``We're alarmed about recent price increases and we won't stand by as citizens' purchasing power is lost.''

``We expected tough words from Trichet, but not quite as tough,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich. ``It's almost as if Axel Weber stood right behind him.''