7 november 2009, interest rates going up

Saturday 7th November 2009

As predicted (6 september), the ecb has begun to position itself to raise interest rates, although as we’re now beyond rate cuts (let’s call it quantative easing, though that’s not quite what the ecb did) they first need to get back to “Go”. Hence trichet’s statement this week that “enhanced credit support” is “not for eternity” and his strong hint that december’s round of extraordinary one year injections will be the last. Norway and Australia are already off the blocks. Not all though can follow so boldly. As trichet also indicated, this necessary monetary tightening cannot stabilise the economy and avoid inflation without what he calls an ambitious fiscal exit strategy. In plain English, that means higher taxes and deep, deep cuts. Can politicians explain what needs to happen and swing the axe viciously enough ? The markets confidence in that (relative to others) is a direct underpinning of the currency market flows, the euro duly strengthening on trichet’s words. On the same day however, the poor old bank of england was forced to continue in precisely the other direction, adding another 25 billion one pound notes to the sterling area (£175b already done), and so increasing the viciousness of the cutting that will be needed. The euro area, with 7 times the UK’s population, did a total of about £50 billion. Sterling duly weakened - as intended, providing a short-term fillip to exports etc. The bigger they come though, the harder they fall – and our fall is shaping up to be the biggest of them all. Lucky the imf is trebling its reserves...