France's Finance Minister has launched an attack on the interest rate policy of the European Central Bank, amid growing concern about policymakers' inability to combat an economic slowdown in the face of rising inflation.
Christine Lagarde, appointed by President Nicolas Sarkozy as Finance Minister last year, told the G8 finance ministers' meeting in Japan that central banks should not focus solely on the battle against inflation.
Mme Lagarde's remarks came as Paul Tucker, a senior Bank of England official, warned of the UK's battle against inflation, and new figures released by the US suggested it is now facing a lethal combination of higher headline inflation and flagging consumer sentiment, which has collapsed to its lowest level since 1980.
Mme Lagarde said that the ECB, which has repeatedly emphasised its determination to tackle inflation, should "be careful of an economic slowdown that could be induced by an interest-rate increase". She added: "There's not just the inflation factor that must be taken into account."
Although conflicting signals have emerged from the ECB over recent weeks, there has been a general expectation that the relative strength of the European economy might lead the ECB's council to raise rates at its next meeting in July. Eurozone rates have been kept on hold at 4 per cent for a year now, with policymakers caught between fear of recession and anxiety about inflation.
However, last week, the ECB's president, Jean-Claude Trichet, said that the ECB was "in a state of heightened alertness" over rising prices and "would act in a firm and timely manner". Market expectations are now for eurozone rates to follow the global trend higher. Analysts anticipate two rises of a quarter percentage point each by the Ecb this year.
M. Sarkozy has been consistently hostile to the ECB's policy, saying soon after he was elected that the single European currency should be "put at the service" of growth and jobs. The German Chancellor, Angel Merkel, and Spanish Prime Minister, Jose Luis Rodriguez Zapatero, have also been critical of the ECB's stance, and warned thatM. Trichet should be more careful with his comments.
Mr Tucker, a possible candidate for deputy governor and currently the Bank of England's director for markets, also struck a more hawkish tone in remarks released yesterday. Mr Tucker said: "The strategy to date has been clear: to offset part but not all of the shock to demand, consistent with an overriding determination to maintain medium-term inflation expectations anchored to the 2 per cent target."
Inflation expectations are currently much higher than that, and the consumer price index to be published on Tuesday will almost certainly prompt a letter of explanation from the Governor of the Bank to the Chancellor to explain why inflation has exceeded 3 per cent.
A tougher stance has also been signalled by the US Fed chairman, Ben Bernanke, with the 0.2 per cent rise in inflation in May unveiled yesterday unlikely to alter that view. However, the collapse of US consumer confidence suggests that American rates are likely to be left on hold rather than raised.Reuse content