October consumer prices inflation report added some new troubles for ECB to worry about as the released 2.6% CPI growth last month exceeded ECB’s target of 2.0%, while the economy growth is not performing at the pace that would allow another rate hike soon.
Until September 2007 ECB had fought inflation with some success – CPI didn’t grow faster than 1.9% – that means that recent interest rates hikes did what they were supposed to do. But September’s CPI growth at 2.1%, October’s 2.6% and expected 3.0% for November call for another increase of the interest rates as soon as possible. Rising oil and food prices contributed a large part to the higher inflation with more than 70% growth on both oil and wheat since the beginning of 2007. But the problem is that even a core CPI (without energy and food prices) grew by 2.1% in October.
But ECB can’t hurry with the rates hike for two reasons – first, higher interest rate on holding the euro will trigger faster currency appreciation, which is already high enough and is hurting European exporters; second, GDP numbers for the 2007 Q3 aren’t very optimistic – 2.6% against 2.9% last year. Combined with a kind of financial crisis which hit many European banks, these factors may outweigh the CPI data and ECB will decide to wait this time.
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