Could the ECB force the Fed’s hand into joining the global inflation fight??
*CNNMoney, by Paul R. La Monica, July 1, 2008
“The European Central Bank is expected to boost a key rate Thursday in order to fight inflation. The move may cause a weaker dollar and force the Fed’s hand.
The fireworks may come a day early for the financial markets if the European Central Bank, as expected, raises interest rates on Thursday.
If the ECB, Europe’s counterpart to the Federal Reserve, hikes rates, that could put even further pressure on the anemic dollar and send commodity prices even higher.
The ECB will announce its decision on interest rates early the morning of July 3 and will hold a press conference shortly thereafter to discuss the decision.
Members of the ECB, most notably its president Jean-Claude Trichet, have been talking loudly about inflation concerns in recent weeks and have hinted that a rate hike will take place at Thursday’s meeting.
If the ECB does raise rates by a quarter-of-a-percentage point, that would leave its benchmark short-term rate at 4.25%. By way of comparison, the Fed’s federal funds rate is just 2%.
The disparity between interest rates in Europe and the U.S. is one key reason why the dollar has weakened as much as it has in recent months.
The federal funds rate was at 5.25% last September before the Fed began slashing interest rates. Meanwhile, the ECB has held pat. (The last time ECB changed rates was with a quarter-point rate hike in June 2007)
Since the Fed started cutting rates, the dollar has fallen 12% against the euro. And the dollar’s slide has contributed to the surge in commodity prices, particularly oil. Crude prices are up 74%.
Considering that the Fed left rates unchanged last week, a rate hike by the ECB may only make matters worse for the dollar in the short-term and lead to even higher oil prices. That would be more bad news for an economy and stock market that’s struggling to grapple with rising energy prices.”
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