BERLIN -- Although
European Central Bank
President Wim Duisenberg hasn't indicated what costume he'll be wearing on Halloween, he has certainly put quite a scare into the Continent's rate-hike phobic.
After hearing Duisenberg and his cohorts ratchet up their hawkish rhetoric over the past couple of months, conventional wisdom has Europe's monetary authorities hiking borrowing costs anywhere between 25 and 50 basis points after the ECB's
meets this Thursday.
However, the central bank's telegraphing to the markets has always been somewhat muddled, and whether it will treat financial markets to a full reversal of its 1/2-point cut last spring or trick everyone and hold off entirely remains far from clear. Accordingly, things on the Continent are likely to remain edgy during the coming week in the run-up to the ECB's decision.
Much of the recent hullabaloo has surfaced around the ECB-cherished M3 money supply growth figures. Running above the bank's 4.5% target rate for months, last week a report showed M3 for September surged 6.1% from a year earlier, compared with 5.7% in August.
Since the end of the summer, Duisenberg has harped on the "generous" liquidity situation in the eurozone, while pointing toward M3 as one of the bank's most important indicators. At the same time, ECB Chief Economist Otmar Issing, who sits on the Governing Council and is a renowned hawk, said in a recent interview that money supply wouldn't be the only consideration for the central bank to hike rates.
Issing's comments, however, were more likely a caution that the ECB would not blindly follow the bouncing M3 figure in making policy, rather than a signal of the bank's reluctance to hike rates.
With the latest money supply figures, "the ECB has all the ammunition it needs to lift 'the foot from the pedal' in the words of Duisenberg," says David Brickman, an economist for
in London. "It does not seem likely
the ECB would continue to talk in this manner without actually acting on interest rates, and the odds on a Nov. 4 tightening have clearly shortened."
Although Brickman expects the ECB to raise rates by only 25 basis points in order to give Europe's economic recovery a little more breathing room, other analysts point to the bank's reluctance to be seen as having an "activist" role in setting monetary policy, increasing the likelihood of a 1/2-point hike.
The argument follows the same logic as the ECB's quashing expectations of further rate cuts by "going large" on its April cut. A 50-basis point hike would thereby allow the markets to relax with the knowledge that borrowing costs were set for a while.
Europe's central bankers also will have the October
indices for Germany, France and Italy to peruse. Due to be released Tuesday morning, the reports are expected to highlight the eurozone's economic rebound.
For the equity markets, much of next week's focus will be on the megaflotation of Italy's state-owned electricity company
on Tuesday. The IPO, which could net upward of $20 billion, would make Enel Italy's largest company by market capitalization.
Also of interest may be this weekend's gathering in Berlin of top CEOs and government officials under the auspices of the
Trans-Atlantic Business Dialogue
. While the conference's leitmotif is rather broad, when people such as
Chairman Juergen Schrempp attend, investors are likely to perk up their ears.
Otherwise the Continent's bourses may get off to a slow start Monday as some European countries celebrate
All Saints Day