ECB should hike rates – but don’t forget Spain

first_imgSunday 3 April 2011 11:26 pm KCS-content ECB should hike rates – but don’t forget Spain More From Our Partners Florida woman allegedly crashes children’s birthday party, rapes teennypost.comNative American Tribe Gets Back Sacred Island Taken 160 Years Agogoodnewsnetwork.orgSupermodel Anne Vyalitsyna claims income drop, pushes for child supportnypost.comAstounding Fossil Discovery in California After Man Looks Closelygoodnewsnetwork.orgBiden received funds from top Russia lobbyist before Nord Stream 2 giveawaynypost.comA ProPublica investigation has caused outrage in the U.S. this weekvaluewalk.comPolice Capture Elusive Tiger Poacher After 20 Years of Pursuing the Huntergoodnewsnetwork.orgRussell Wilson, AOC among many voicing support for Naomi Osakacbsnews.comBrave 7-Year-old Boy Swims an Hour to Rescue His Dad and Little whatsapp Share whatsapp Tags: NULL It is all but certain that the ECB will raise rates this week. It has been itching to do so for some time. Now that the moment has arrived what will the move actually mean for the Eurozone and the global economy? The simple answer is probably not very much. The move has been well telegraphed and priced in to financial assets. The key policy rate will also remain well below an inflation reading that in February hit a 29-month high of 2.6 per cent. Some degree of normalisation is desirable. The current ultra-easy money environment is not sustainable without creating huge distortions further down the road. Drilling down further, rates are not in any way appropriate for the big economies of France and Germany, which are well on their way to recovery. The real issue though is not what happens on 7 April but after it. Pragmatically, the ECB should tighten slowly and carefully. The economic environment remains unclear with the situations in Japan, North Africa and the Middle East still unresolved. However, the biggest uncertainty policy makers face is how the periphery of the region will respond to a higher cost of borrowing. The central bank says it can do no better than set policy for the whole of the area. True, but is the ECB really prepared to feed the weakest members of its flock to the wolves? Despite ongoing liquidity support, an abrupt change in the cost of money will kill off any hope of recovery for many. The critical country to watch now is Spain. While Greece, Ireland and Portugal matter, they are still minor players within the euro area. Spain is its fourth largest economy. It matters not only to the ECB but also to the markets. Judging by yields in the secondary market, investors have become more relaxed about prospects for Spain over recent weeks. This may change. The cost of recapitalising the country’s savings banks is still unknown, as is the impact of tighter money on the broader economy. Spain has large numbers of variable mortgages which means that any move from the ECB will be quickly transferred to the already stretched consumer. If Spain shows signs of faltering then the Eurozone has a massive problem. At that point rate rises may need to stop or even be reversed. This, though, is for the future. Tightening is the right thing to do right now. Pricing in an aggressive tightening cycle is not. There are still too many unknowns: both the ECB and investors should tread very carefully.Guy Johnson co-anchors European Closing Bell weekdays on CNBC. Show Comments ▼last_img

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