Americans know the term "stagflation"; the decline in economic activity accompanied by an artificially inflated money supply is what Europe is presently experiencing. On Thursday, European Central Bank President Jean-Claude Trichet announced that the ECB had raised its interest rates 1.5 points and suggested that this action, intended to contract the money supply, might be pursued more aggressively in the future — even though the so-called "PIGS" nations of Europe (Portugal, Ireland, Greece, and Spain) need influxes of money in order to prevent default.
While Trichet recognized that this hike in interest rates might slow down the world economy, he stated that controlling inflation remained the bank’s most important task at present. He hinted that another raise might be in store in future months, noting that the bank would “monitor very closely” price developments, which has been a code for suggesting that interest rates would not be raised the next month. “Our monetary policy stance remains accommodative," he assured. "It is essential [that] recent price developments do not give rise to broad based inflation pressures over the medium term.” Marc Ostvald, an market strategist at Monument Securities, advised: "A further quarter point rate hike probably in October or November still appears to be the central scenario."
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Photo of Jean-Claude Trichet: AP Images