ECB President Trichet yesterday warned of a possible July rate rise, in line with the hawkish message from my ECB-ometer – see here. Any increase is unlikely to mark the start of a new trend, however. One reason is that the ECB’s policy stance is already reasonably restrictive – the current repo rate still exceeds headline CPI inflation and is comfortably above the core rate (i.e. excluding food and energy).
The same cannot be said of the US and many emerging markets. The chart below shows weighted averages of short-term interest rates and CPI inflation in our “E7” grouping of major emerging economies (Brazil, Russia, India, China, Korea, Taiwan, Mexico). Central banks in these countries are in tightening mode but in most cases look well “behind the curve” (exception: Brazil). Officials are reluctant to move aggressively partly for fear of excessive currency strength given the super-low level of US rates.
The Fed’s maxi-ease is creating global not just domestic inflationary headaches.
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