Is Mr Trichet trying to have it both ways?

EUROPEAN Central Bank president Jean-Claude Trichet looks to be trying to have it both ways on the economy right now.

Earlier this week he told the European Parliament that, although the European Central Bank (ECB) was sticking with its forecast for 2% growth this year, risks to this figure were growing.

Then just in case he might be indicating a softening on the bank’s stance on interest rates, he stressed the importance of keeping inflation under control.

Some interpreted that latter comment as dampening hopes that Europe would follow the US Federal Reserve in cutting rates.

“In all circumstances, but even more particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations,” said Mr Trichet, which seemed to be saying watch my lips — we will not cut interest rates.

Indeed with eurozone inflation running at its highest in over six years, the ECB had previously warned it would raise rates where inflation was way above its 2% inflation rate mandate.

However, it held back in September under pressure from the global financial markets who warned a hike by the ECB would be disastrous.

Since its inception it has managed its brief successfully, and the integrity of the ECB and its stature is fully recognised at this stage.

With the outlook for a slowing global economy increasing, price pressure in the eurozone will ease and if the global economic uncertainty continues the bank will be forced to cut rates.

The behaviour of stock markets this week was firmly saying the global economy was on a slowdown and earnings have been grossly over-estimated and by implication the value of company shares have also been over-hyped.

It looks as if the global economy is going to slow down, including India, China, Brazil and Russia, which were expected to stay unaffected by US events.

It could be mid-year before the full implications of the subprime crisis in the US is fully accounted for with some suggestions that up to €400 billion in further write offs across the global banking world still have to be accounted for before all of the bad news is laid to rest.

From an Irish perspective, this global bad news might be the silver lining the construction sector needs to rescue it from its slump.

Increasingly analysts believe the ECB is just dancing round the interest rate cut issue at this stage and that a cut of up to 0.5% will be in place sooner than we think if the slowdown internationally looks to be pointing towards a long global recession.

This week Eunan King of NCB predicted Mr Trichet and his colleagues would have their hands forced despite the fears about inflation and that a cut of 0.5% was on the way, not necessarily immediately, but down the line.

Yesterday Dan Mclaughlin, chief economist at Bank of Ireland, took the same stance. In his view the past few months have seen a “dramatic change in interest rate expectations”.

That happened in the US where the Fed cut rates 1.75% since September as fears the subprime mortgage crisis is pushing the US into a deep recession.

Bank of England will follow shortly and it is now almost inevitable that Europe will also join in the rate slashing in the months ahead, he said.

It does look as if the situation in the global economy has deteriorated to the point where a concerted global effort is required to keep the economies of the world from sinking. From an Irish perspective the cuts when they come will be fortuitous given the pressure on the property sector.