Europe and U.S. Diverge on Rate Prospects - by Mark Landler

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Europe and U.S. Diverge on Rate Prospects - by Mark Landler

On Thursday, the Federal Reserve chairman, Ben S. Bernanke, signaled this week that the Fed would cut rates to try to ward off a recession. And a growing number of economists, convinced Europe is not as insulated from America’s woes as many Europeans would like to believe, question why, at such a fragile moment, the European Central Bank is warning it might raise interest rates. “The E.C.B. sees the glass as half full; the Fed sees it as half empty,” said Thomas Mayer, the chief European economist at Deutsche Bank. “It’s not a difference in the data; it’s a difference in the analysis.” The European Central Bank, Mr. Mayer said, still does not believe that the credit crisis originating in the American mortgage market poses a grave risk to Europe’s underlying economic prospects. The bank, he said, is threatening a rate increase when it should be preparing for a rate cut.

The simplest explanation for the European Central Bank’s hawkish demeanor is its inflation-fighting mandate. The bank’s president, Jean-Claude Trichet, has warned labor unions that they should not use Europe’s inflation rate of 3.1 percent as a pretext to demand steep wage hikes.