by Richard Barley
Wall Street Journal
March 4, 2011
The gloves are off. The European Central Bank is calling time on the hugely accommodative monetary policy that has prevailed since 2009. Barring a fresh leg of the financial crisis, rates could rise in April. ECB President Jean-Claude Trichet is determined his track record on inflation is not to be tarnished and looks set to leave the Bank of England and U.S. Federal Reserve in the dust.
Mr. Trichet's hawkishness shocked markets, sending the euro and two-year Bund yields spiking higher. But looking at the core euro-zone economy, a potential rate raise from emergency levels—at 1% the ECB's key rate is negative in real terms—is hardly a surprise. Unemployment and growth in Germany are at levels last seen when the country was reunified 20 years ago and the recovery is broadening across Europe. Euro-zone consumer inflation came in at 2.4% in February and producer price inflation at 6.1% in January. With fears that some of the increases in energy and food prices are permanent, the risk of second-round effects is rising—particularly in Germany where labor market shortages are showing up. The ECB is determined to head these off at the pass and maintain Europe's competitiveness.
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