Further pressures for an ECB raise?

It seems so, but it is not all bad news if you leave the monetary policy decisions aside for a moment. Consequently manufacturing is picking up in the Eurozone.

"Eurozone manufacturing growth has reached the fastest rate for almost for six years, according to the latest figures that suggest the economic upswing in the 12-country region has extended well into the second quarter of this year.

The unexpected rise in the eurozone manufacturing purchasing managers’ index, from 56.7 in April to 57.0 in May, marked the eleventh successive monthly improvement in business conditions

“This surging growth has brought the welcome news of improved employment, which rose at the fastest rate for five-and-a-half years in May,” said Kevin Gaynor, economist at the Royal Bank of Scotland, which releases the data with NTC Economics. But he added that it had also “led to the build up of inflation pressures”.

Input prices had been pushed up by higher energy costs, but rising domestic demand had also increased manufacturers’ pricing power. Inflation pressures were “in the ascendancy” in Germany, the Royal Bank of Scotland added.

The European Central Bank is expected to lift its main interest rate by at least a quarter percentage point on June 8. Recent data has increased the risk of a larger-than-usual half-percentage point rise, economists said."

So, should the ECB raise (see also my last post)? Well, most of the economist pundits seem to believe that outlook for Europe's economy is strong enough to merit a raise and also the recent tumbling of the dollar might also help keep inflation at bay in the Eurozone. Mark Gilbert from Bloomberg even predicts that the recent trend of a quarter point raises may be shifted to half a point next week in order to keep the money supply down. Easy credit to companies and consumers are the data point to watch here according to Gilbert.

"The twin-pillars brand of monetary policy bequeathed to the ECB by Germany's Bundesbank means money supply matters as much as consumer-price inflation when setting borrowing costs in the euro region. And the pace of money-supply growth is sending an unambiguous signal to the guardians of economic stability.

Moreover, it isn't the headline money-supply figure that threatens to push the benchmark interest rate to 3 percent from 2.5 percent in one short, sharp move. It's an acceleration in loans to consumers and companies that is setting off alarm bells in Frankfurt.

Money supply climbed 8.8 percent in April from a year earlier, the fastest growth in almost three years. The ECB's rubric deems money-supply growth that exceeds 4.5 percent as inflationary. It has been able to ignore missing that target every month for the past four years, though, because its analysis of the data showed that the flows were being swollen by investors shifting money between different asset classes.

Now, however, the catalyst is borrowing. Loans to residents surged 11.3 percent in April. That's the fastest pace since the central bank began collating the data in September 1998. Loan growth has almost doubled in the past two years, and is up from 9.2 percent at the end of last year and from 7.1 percent at the end of 2004. It has accelerated for 12 consecutive months."

My main gripe with all this is the notion of the sustained positive outlook for the Eurozone which is an underlying assumption here. It is difficult for me to see this, at least to the extent that it is sustainable enough to act counter-cyclically. On the other hand; rates are being raised from a relatively low level so in the end and since I am no specialist in monetary policy I don't really know. My ultimate feeling though is that the bets on the positive outlook for the Eurozone perhaps have been hedged too early here.