Thursday, October 02, 2008

Trichet: Lets talk about throwing in the towel

Trichet and the ECB finally recognize the gravity of their predicament. My thesis of interest rate compression in developed countries has certainly not been refuted by the outcomes.

Oct. 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet's balancing act may be drawing to a close.

With the euro-region sliding toward its first recession since the single currency began trading in 1999, Trichet's ECB is finding it increasingly difficult to fight inflation and at the same time protect its 15-nation economy from the global credit crunch.

The result may be a move toward lower interest rates as financial turmoil damps growth and reduces inflation pressures. The crisis reached new heights in Europe this week, with governments forced to help bail out five banks and credit costs soaring to records as financial companies hoard cash.

``The ECB's Governing Council will have had a serious wake- up call in recent days,'' said Juergen Michels, a London-based economist at Citigroup Inc., who expects the bank to cut rates in December. ``The credit crunch has arrived on its doorstep.''

While the Frankfurt-based ECB left its benchmark rate at a seven-year high of 4.25 percent today, economists at Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. this week followed Citigroup in predicting a rate cut before the end of the year. Trichet is due to hold a press conference at 2:30 p.m.

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