Financial Times
March 4 2011
The minute Jean-Claude Trichet, the talented president of the European Central Bank, uttered the phrase “strong vigilance”, global markets immediately pushed European interest rates significantly higher and the euro strengthened.
This understandable reaction to the prospects of an interest rate rise highlights the policy dilemma facing not only the ECB, but also other central banks around the globe.
Mr Trichet’s remark was largely motivated by the multi-month surge in energy and food prices (which, in the case of oil, has been amplified in recent weeks by the uprisings in the Middle East and North Africa).
He and his colleagues at the ECB face the certainty of higher “headline inflation” and, given the recent strengthening of the global economy, the possibility that “core inflation” could also rise quickly as companies look to pass through the impact of higher input costs.
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