European Central Bank

Food and energy prices are rising and inputs for producers grow more expensive by the day, putting enormous pressure on central bankers to keep inflation low. This is pressure is particularly acute for Mervyn King and Jean Claude Trichet, the heads of the Bank of England and European Central Bank, who promise their governments to keep inflation around 2%. With no sign of a break in energy prices, the Bernanke Fed has also been warned by former Fed Chairman Paul Volker to keep inflation low. Volker said last week that there is a resemblance between today and the 1970s and that the Fed already introduced enough liquidity into the market.

Snapshot asks, are central bankers recklessly abandoning their inflation targets?

Martin Wolf - Britain Must not cut loose its anchor
Financial Times - Higher inflation stems from official neglect
Paul Volker - Act now to avoid inflation
Janet Yellen Federal Reserve Bank of San Francisco - Combination of Risks

The euro may be overvalued, but don't expect it to fall anytime soon. Rising commodity prices have pushed eurozone inflation to a sixteen year high at 3.6% and the European Central Bank remains committed to inflation targeting monetary policy. The ECB recently pushed back against the Bank of England and IMF who claim there is room for rate cuts. On the other side of the Atlantic, recession fears led to aggressive interest rate cuts in the United States. The weak dollar has caused a rise in the price of imports increasing inflation, but also made exports cheaper and more attractive to foreign consumers. The earnings reports from internationally exposed companies in the first quarter of 2008 cited strong foreign demand and better than expected earnings.

Snapshot asks, where will the euro be at the end of 2008?

European Central Bank President Jean-Claude Trichet is open to cutting interest rates for the first time in almost five years citing "unusually high uncertainty" about economic growth. Experts and analysis disagree on where ECB monetary policy will fall this year: JPMorgan believes rates to hold at 4% through 2008, Citi expects a 50bp cut by year end with 25bp cut in Q2, and Societe Generale expects rate of 3.25 by year end.

Wall Street Journal - BOE Cuts Rates, ECB Keeps Steady
Economist – Going it alone
Societe Generale – ECB Watch
Citigroup – Monetary Policy Reconsidered
European Central Bank – Jean-Claude Trichet Press Conference Feb 7, 2008
Wolfgang Monachau – Expect the eurozone to show its resistance
Commerzbank – What Prompts the ECB to Cut Interest Rates