While the expectations of optimists/wishful thinkers that the European Central Bank would cut its benchmark interest rate rate as early as April, was not expected by most credible market analysts to be realised, a wage settlement won by German steelworkers will strengthen the case of the hawks on the ECB Governing Council, to keep the rate on hold at 4% in the short-term.
IG Metall, Germany's biggest trade union, on Wednesday announced that it had won a 5.2% pay rise for some 85,000 steelworkers at companies such as industry giant ThyssenKrupp AG. The settlement is the biggest increase in the German steel industry in 15 years and above the current inflation rate of 3%.
The 13-month pay agreement, which also include one-off bonuses, is equivalent to an annual increase of about 4.5%. “This is the best result for 15 years,” said Oliver Burkhard, local leader of the IG Metall.
ECB President Jean-Claude Trichet has repeatedly warned about "second-round effects" in response to the elevated level of inflation in the Eurozone that was 3.2% in January compared with the central bank's target rate of"below but close to 2%."
IG Metall had tabled a request for an 8% rise. Ver.di, Germany's second-largest union, is seeking an 8% rise for about 1.3 million workers on federal and local government payrolls.
Besides wage rises, the return this week to $100 per barrel oil and food/beverage commodities hitting record highs, is a reminder of the presence of global inflationary pressures.
Finfacts Report: Oil price closes above $100 in New York; Tea, coffee and cocoa close to boiling point; Wheat price forecast to break new records; Rapeseed and palm oil prices in Europe and Asia hit new records on expected Chinese demand
Axel Weber, Germany’s Bundesbank President, warned last week that financial markets’ expectations did not take proper account of the inflation risks.
Also on Wednesday, it was reported that German producer price inflation jumped to 3.3% annual rate in January.
A slowdown in the Eurozone economy may be seen as a factor in depressing inflation risks, making ECB rate cuts more likely in coming months but fears that have surfaced in the US this week of a return to stagflation - a slowing or contracting economy coincident with rising inflation - shows that choices for policymakers are far from simple.
Finfacts Report: Fears grow of stagflation in the US; Credit turmoil accelerates in US and European corporate debt markets
Bloomberg says in a report today - Financial markets have it wrong: Jean-Claude Trichet isn't about to cut interest rates, according to the Merrill Lynch & Co. economist who defied conventional wisdom by correctly predicting the European Central Bank president's course two years ago.
Klaus Baader, Merrill's London-based chief European economist, said he doesn't expect Trichet to lower borrowing costs this year. His view, shared by economists at Goldman Sachs Group Inc., ABN Amro Holding NV and Morgan Stanley, conflicts with the opinion of most investors and economists that the bank will reduce its key rate from 4 percent.
