"Strong Vigilance is needed" said Jean-Claude Trichet three times in Thursday’s European Central Bank press conference.
Fabrice Coffrini | AFP | Getty Images
Jean-Claude Trichet
The comments mean euro zone borrowing costs are going to rise in July and Carl Weinberg, the chief economist at High Frequency Economics believes a greater policy mistake is "inconceivable".
“Our first response to this decision is to mark down our outlook for economic growth in euro land by another one-quarter percentage point. This is to say that economic contraction this year is now assured,” said Weinberg in a research note on Friday.
Amid talk that global inflationary pressures are easing, Weinberg is predicting an ECB rate hike will lead to deflation by May 2012.
“Without a sovereign default in the euro zone, we predict core CPI will be declining by next May, driven by a severe economic downturn,” he said.
“In other words, we expect poor monetary policy to worsen a deflation in the euro zone” said Weinberg.
With a number of banks still forced to borrow from the ECB in the overnight repo market, Weinberg is very worried about the implications of higher borrowing costs for the industry.
“Nothing good can come from punishing these banks by raising their funding costs and squeezing their profit margins,” he said.
“Meanwhile we cannot resist pointing out that it is daft to be raising interest rates when two countries in the euro zone are on the brink of default,” said Weinberg, referring to Greece and Portugal.
“It is futile to try and talk sense to the ECB. Oblivious of its commitment to prevent deflation – which we think will be the consequence of the policies already in place, and which would explode were there to be a sovereign default – the central bank council insists on fighting an inflation that does not exist,” he said.
“Even if there where a risk of inflation – which we do not see – the non-trivial risk of financial collapse would appear to be greater,” said Weinberg.
“What can we say?”
