Pulled In Two Directions

The ECB is in a difficult position as it has a mandate for price stability, yet growth numbers emerging from the Eurozone remain extremely lackluster and sluggish. Eurozone headline inflation has been steadily above the 2-percent target — 2.5 percent in October and 2.6 percent in September.

Eurozone Finance Ministers have been speaking publicly against the need for a rate hike by the ECB because they feel it would not help the slow-growth scenario that continues to unfold there. As of mid November, the European Commission was forecasting gross domestic product (GDP) growth of 1.3 percent for 2005.

“The Eurozone is slowly recovering from pretty poor performance in the first half of the year,” said Charmaine Buskas, an economist at Economy.com, ahead of Trichet’s Nov. 18 comments. “This is a conundrum for the ECB. Do they act to protect their price stability to keep it in line with their mandate or do they stand aside and allow growth to unfold organically?”

Trichet appeared to be keenly aware of the political pressures from Eurozone Finance Ministers. Trichet noted the ECB would “maintain moderation and accommodation and the policy would remain accommodative.”

“This is the worst piece of central banking I’ve ever seen,” says Thomson’s Coleman. “He says we are going to hike, but not by much. To downplay the impact of hikes before they even start hiking takes away some of their credibility.”