No surprise, the Monetary Policy Committee has held interest rates steady.But at 12.45 the ECB is expected to raise rates for the Euro area, from 1.25% to 1.5%, despite debt problems in the periphery.
CPI in the Eurozone is currently running at around 2.9%. Above target, it's true, but some way below the UK's rate of 4.5%.
And yet, in the UK, the MPC has said that there may be circumstances where more QE would be appropriate. In a speech on the 27th June Adam Posen – chief dove on the MPC – laid out some of the reasons he though the UK was likely to avoid an inflation spiral.
I will consider some of those, in relation to the EU, here.
1) There is an output gap in the UK which should bear down on inflation
The Eurozone has recovered more ground post-recession than the UK, which would suggest the output gap could be lower, and there are more grounds for a rate rise in the region, though this is a somewhat crude measure. Regardless, output is still some 2.1% below peak in the area, suggesting the room for non-inflationary growth has not been entirely used up.
GDP (Index Q1 2008 = 100)
In addition, unemployment in the Eurozone is somewhat higher than in the UK (though this was the case before the recession too), which might imply a greater margin of spare capacity.
2) There has been no significant credit expansion in the UK
The supply of broad money (which can be used to forecast inflation) in the UK does not indicate that there has been an expansion of credit in the country. This is true in the EU to an even greater extent.
Broad Money - M3 (Index Jan 2010 = 100)
3) Unit labour costs have not risen markedly
Unit labour costs are a measure of productivity and can provide an indication of the pressure wage costs are putting on the total cost of production. They have risen slightly in the UK since the recession ended, though this has not been the case in the euro area.
Unit labour cost (Index Q1 2010 = 100)
So it seems that some of the underlying factors which could bear down on inflation in the UK are also evident in the euro area. The question, then, is why is the ECB looking to raise rates?
If the ECB does indeed raise rates, it is likely to be because the bank fears current high levels of inflation feeding through to higher expectations.