Tuesday, 22 February 2011

ECB turns hawkish as eurozone economy turns hot

The eurozone economy showed no sign of slowing in Monday's economic reports.

PMIs are at new post-recession highs. Reuters reports:

For the euro zone as a whole, Markit's flash manufacturing PMI leapt to a near 11-year high of 59.0 from 57.3 in January, beating expectations for 57.3.

The flash euro zone services PMI, which measures activity in companies ranging from banks to hotels, rose to 57.2 from 55.9 in January, its highest reading since August 2007...

Worryingly, for policymakers concerned about inflation, the costs of raw materials and energy soared at their fastest pace in the survey's near 14-year history. The factory input price indicator jumped to 85.7 this month from 79.2 in January.

The output price index also climbed to a survey high, suggesting firms were passing on some of the increases to customers...

The euro zone composite index, compiled from the services and manufacturing sectors and often used to predict overall growth, bounced to 58.4 this month from 57.0 in January, smashing expectations for 56.9 and notching up its highest reading since July 2006.

In Germany, business confidence has hit a record high. Bloomberg reports:

German business confidence unexpectedly rose to a fresh record high in February as booming exports spurred hiring and consumer spending.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 111.2 from 110.3 in January. That’s the highest since records for a reunified Germany began in 1991. Economists predicted the index would hold steady, according to the median of 38 forecasts in Bloomberg News survey.

Little wonder that ECB officials are sounding hawkish. From Bloomberg:

European Central Bank policy makers signaled they may support raising interest rates in coming months as the economy recovers and imports fuel price pressures.

“We’re prepared to act decisively and immediately if needed,” ECB Executive Board member Juergen Stark said at an event in Frankfurt tonight. “The objective is pretty clear. In order not to risk un-anchoring inflation expectations, we have to change the monetary policy stance if need be.”

With inflation above the ECB’s 2 percent ceiling and its benchmark rate at a record low of 1 percent, officials must gauge whether the resulting liquidity situation “is still appropriate,” fellow Executive Board member Lorenzo Bini Smaghi said in Hong Kong today. “Clearly as the economy is better, maybe this assessment has to be revised.”

Meanwhile, flash PMI readings from China indicate that its tightening measures may already be having some impact. The Wall Street Journal reports:

The preliminary HSBC China Manufacturing Purchasing Managers' Index, a gauge of nationwide manufacturing activity, fell to 51.5 in February from January's final PMI reading of 54.5, HSBC Holdings PLC said Monday...

However, measures of both input and output prices rose, meaning inflation pressures remain.

China's Lunar New Year holiday in February may also have contributed to the slowdown though.

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