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Tuesday, April 11, 2006

Interest Rates: The Gung Ho Approach?

I can't help but be struck by the difference of approach which seems to be revealed in two separate stories in the news today. The first comes from Japan:

The Bank of Japan kept interest rates close to zero as it awaits more evidence the world's second-largest economy can withstand the first increase in borrowing costs since 2000.

Now from the ECB:

European Central Bank council member Klaus Liebscher signaled the bank may raise interest rates in June to curb inflation and said policy makers may lift their estimate for 2006 economic growth in the dozen euro nations.

While the ECB doesn't want to increase rates next month, there is ``no all-clear'' on inflation and ``still a need for action,'' Liebscher, who heads the Austrian central bank, said in an interview in Vienna yesterday. ``The next meeting is in June. If you look at the whole picture that we've painted, then I'd say that's the next appointment.''

Liebscher's comments echo those by ECB President Jean-Claude Trichet on April 6, when the bank kept its main lending rate at 2.5 percent and quashed investors' expectations for an increase in May. Trichet said economic growth is strengthening and pressure on inflation is mounting, though his remarks on timing sent the euro to its biggest drop in two weeks.

Now Japan is being understandably and rightly cautious, so whence the seeming gung ho confidence in Europe, where the ECB seem to be doing their best to encourage the markets to think that a June rate rise is coming (and that more will follow), certainly it doesn't come from a clear sign that the reform process is advancing and working (which, of course, there is in Japan):

For the European Commission and other EU member states, the French government’s humiliation offers a sobering lesson: six years after the EU declared its ambition to become the world’s most competitive economy by 2010, member states are struggling to push through the kind of reforms needed to achieve that goal.

France is far from unique in its reluctance to embrace economic reform. In Germany, Angela Merkel has yet to capitalise on her comfortable majority in parliament and strong popular support to push through deep structural reforms. In Italy, business groups have chided the dearth of reform under Silvio Berlusconi’s tenure as prime minister.

So I can't help asking myself this: just how rational are people being in Europe about our actual situation right now? Simple wishful thinking won't work I'm afraid.

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