In an interview with the Wall Street Journal, European Central Bank President Jean-Claude Trichet reiterated his view on inflation once again, stressing that the Governing Council will not look into the temporary jump in inflation, a move intended to suppress expectations for soon to be seen monetary tightening by the bank.
Trichet said that the spike in inflation is triggered by higher commodity prices and is not expected to fuel wage increases or so called second-round effects and accordingly anchoring the fears for now and maintaining price stability according to the text published by the ECB late yesterday.
According to the text Trichet said all central banks, in periods like this where you have inflation threats that are coming from commodities, have to go through the hump and be very careful that there are no second-round effects while stressing again that the bank does not see any such threat at this stage.
The ECB left rates steady at 1.0% in January with the start of 2011 even as inflation unexpectedly accelerated to 2.2% in December, above the comfort zone for the bank at 2.0% for the first time in two years.
In the press conference following the decision Trichet appeared to markets with a stronger hawkish stance insuring that price stability of the essence and that the ECB will be monitoring conditions closely. Nonetheless, as rates remain appropriate the last thing Tricht needs now is further speculation on interest rates by the market and a stronger euro that might further agitate a fragile recovery haunted by the debt crisis, and for us we surely see the market starting to tend less bearish on the common currency with the start of the year.
Investors are trimming their short positions on the euro as the recovery is ongoing and the EU is standing steady with tight arms to contain the debt crisis. Surely we can also attribute a slight sense of relief to the successful debt sales seen from so called peripheral nations which eased the woes for now and shifted the focus to the ECB which Tricht obviously tried to contain to suppress expectations for the ECB to turn into inflation fighting mode from the current clear dovish stance.