[R-G] European Central Banker Says Inflation Is Still Focus

[Yoshie Furuhashi]

Lack of coordination among the power elites of the empire this time? -- Yoshie

<http://www.nytimes.com/2008/01/24/business/worldbusiness/24euro.html>
January 24, 2008
European Central Banker Says Inflation Is Still Focus
By CARTER DOUGHERTY

DAVOS, Switzerland — The president of the European Central Bank gave a
full-throated defense Wednesday of the bank's determination to fight
inflation, quashing hopes — at least for now — that it might follow
the United States Federal Reserve in cutting interest rates to contain
an economic slowdown.

Jean-Claude Trichet, the central bank president, said the bank, which
hinted this month that it might raise interest rates, needed to focus
on keeping inflation low, an approach that he argued would help calm
increasingly chaotic financial markets.

The stance offered a sharp contrast to the Fed, which has shifted its
focus over the last six months from fighting inflation to
kick-starting the American economy. The Fed aggressively eased
interest rates further in an emergency move Tuesday.

Unlike the Fed, which is required by law to promote employment while
keeping prices stable, the European Central Bank's sole role is that
of a sentinel against inflation.

"Particularly in demanding times of significant market correction and
turbulences," Mr. Trichet said in testimony to the European Parliament
in Brussels, "it is the responsibility of the central bank to solidly
anchor inflation expectations to avoid additional volatility."

European markets sold off sharply on Mr. Trichet's remarks, which
damped investor hopes that the bank would follow the Fed's lead. The
CAC 40 in Paris and the DAX in Germany closed down more than 4
percent.

The Fed's move, which reflected a dire view of the state of the
American economy, raised pressure on the European bank to concede that
the slowdown an ocean away would drag down Europe, where the major
countries are expected to show slightly softer economic growth after
two years of robust performance.

Mr. Trichet did take care to note that slower growth and slackening
demand among consumers and corporations could damp inflation. By this
logic, if the European economy did weaken, the bank would have room to
lower rates.

Early this month, the European bank kept its benchmark interest rate
at 4 percent. Mr. Trichet even threatened to raise rates if European
labor unions sought pay increases to compensate for higher food and
energy costs. Still, financial markets have already assumed that the
central bank will follow the Fed later this year.

Through bets on short-term securities, traders have bet that the bank
will lower rates beginning in April, and follow through with
additional cuts in the summer and autumn. That probably reflects a
conviction that the bank is waiting out the early rounds of wage
negotiations — a spring ritual in Europe — before shifting its stance
to accommodate a worsening economic outlook.

"The E.C.B. is not really signaling that it will raise rates here,
just threatening to — a bit like having a nuclear weapon," said Julian
Callow, chief Europe economist at Barclays Capital in London.

The bank has consistently played down the danger to the European
economy posed by weakness in the United States, citing trade within
the 15-country euro area and buoyant demand from Asia for euro-zone
exports. A rising number of economists in Europe have begun to dispute
this view, citing surveys of business and consumer confidence that
hint at weaker growth.

The widening difference in interest rates has become fodder for debate
at the annual meeting of the World Economic Forum here over whether
financial authorities are up to managing both financial market chaos
and a worsening economic outlook.

Nouriel Roubini, a professor at New York University, said the European
Central Bank had fallen far behind in a world where monetary policy
takes up to 18 months to have an effect.

"The E.C.B. is still on hold," Mr. Roubini said. "I believe they are
behind the curve."

C. Fred Bergsten, the director of the Peterson Institute for
International Economics in Washington, offered context as well to a
slowdown in the world's largest economy. If emerging markets lose one
percentage point of growth this year, when an American recession and
the credit squeeze are factored in, and rich countries average growth
of 1.5 to 2 percent, the result is 4 percent global growth, hardly a
lame showing, Mr. Bergsten noted.

"It is inconceivable — repeat, inconceivable — to get a world
recession," he said.

--
Yoshie
<http://montages.blogspot.com/>