Thursday 8 December 2016

Trichet's bombshell makes bad situation even worse

Laura Noonan in Frankfurt

Published 04/03/2011 | 05:00

EUROPE'S most powerful banker was on the podium, talking about the rising risk of inflation and the need for "strong vigilance" to make sure price rises didn't get out of hand. Then came the bombshell.

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"An increase in interest rates in the next meeting is possible," ECB chief Jean Claude Trichet simply said.

The implications of the statement swept through the room -- after more than two years, interest rates were on the way up.

As Trichet watched the press pack spring to life, he quickly tempered his words -- the ECB was "not pre-committed" to an interest rate increase, a rate hike was "not certain" and would not be decided until after the next meeting of the ECB's governing council.

But headlines like "Trichet warns of impending interest rate hike" had already appeared on news screens all over the world.

We may associate the ECB mainly with the euro currency, which it created and controls, but the ECB's main remit is inflation.

The thing that keeps Trichet up at night is making sure price rises in the 17 eurozone countries are "close but below 2pc" over the "medium term".

Solution

In December, the ECB was predicting 2011's inflation rate at between 1.3pc and 2.3pc. Yesterday, that was raised to between 2 and 2.6pc as oil and commodity prices spiral.

The ECB's solution? Hike interest rates. Higher rates mean people have less cash because they have to spend more on loan repayments.

So people spend less, demand goes down, and prices come down and order is restored.

Mr Trichet was making no apologies yesterday, however, for the hardship that could inflict on weaker economies like Ireland's.

"Our responsibility is for 331 million people," he said.

"Price stability is essential for the poor and most vulnerable," Trichet added, lest there be any perception the ECB was unmoved by the plight of the little people.

That will come as cold comfort to many Irish homeowners and businesses as their finances struggle to accommodate a rate increase.

Irish Independent

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