Strategy

Europeans Target Inflation, not Slowdown

Keeping interest rates at their current level will ward off price hikes.
Stephen TaubApril 4, 2008

European officials seem more interested in checking inflation than heading off a recession, as U.S. officials are doing. European Central Bank president Jean-Claude Trichet seemed to indicate that it is more important to hold interest rates at their current level than lower them to stimulate the economy, the Associated Press reports.

“Price stability is something which is essential for the poorest and the most vulnerable of our citizens,” Trichet reportedly said after he joined euro finance ministers for talks. “They cannot protect themselves against inflation. It is extremely important that we understand that moderation today is necessary if we want to deliver price stability in the medium term.”

Prices in Europe for oil and food pushed inflation to 3.5 percent in March, way above the European Central Bank’s guideline of 2 percent, the AP notes. Indeed, the key lending rate in the European Union has remained at 4 percent since last June. However, the U.S. Federal Reserve and the Bank of England have cut rates a number of times to head off a collapse in the financial system and the economy and to encourage banks to lend.

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The result of the diverging approaches to interest rates will likely be further erosion of the value of the U.S. dollar versus the euro and other currencies. A strengthening euro does make it cheaper to buy oil, which is priced in U.S. dollars and has been mostly hovering over $100 a barrel.

Meanwhile, in the United States pressure will probably mount for a further rate cut after Friday’s worse-than-expected jobs report. Employers cut 80,000 jobs in March, the most in five years and the third-straight month of reductions. The unemployment rate jumped from 4.8 percent to 5.1 percent.

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