Situation
On a monthly basis prices were up by 0.32% in Feb’07 ( Jan’07 prices increased by 0.23%)
On an annual basis prices rose by 2.92 % p.a in Feb’07 ( Jan’07 prices increased by 3.08%). This is the lowest rate of growth since Aug’04 ( 3.09% p.a).
Background
- The European Commercial Bank (ECB) had raised its interest rates from 3.25% to 3.75%, in Dec’06 (25 basis ponts), and in Marc’07 (25 basis points).
- The second hike was in line with the ECB’s declared intent in Dec’06 to raise interest rates in Mar’07. However the reasoning behind this hike could be questionable. ( read : Euro area - ECB raises interest rates by 0.25 basis points to 3.75 percent per annum )
- New orders have had a negative growth rate . Production is down.
- The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. They have achieved this primary goal. ( read : Euro area - CPI Prices up by 1.8% p.a in Jan’07).
Conclusion ( click on image for a larger visual)
- Effects of the twin interest rate hikes in Dec’06 and Mar’07 can be expected to continue to keep prices lower for the Apr’07 towards Jun’07 period. ( at the very least)
- Producer prices can continue to drop towards 2.00% - 2.50% p.a towards Jun’07 , and post this drop remain below 4.00% p.a for the rest of the year. Consumer prices can therefore be expected to drop in the coming months.
- With inflation being contained, and due to point 3 ( see back ground) ECB normally cannot be expected to raise interest rates in the near future.
However as can be seen in first link in the post - the last hike was inspite of the fact that inflation was well within ECB’s inflation target range .