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Bond Outlook June 11th

In the debate dual-mandate versus inflation-focus for central banks, the ECB approach of “control inflation and the rest will follow” seems ahead with even the Fed coming round.

Bond Outlook [by bridport & cie, June 11th 2008]

Last week we wrote that it was difficult to call the moment when a bubble begins to deflate, then promptly demonstrated just how difficult this call was by suggesting that the turning moment for the commodities bubble had arrived. Wrong! Oil turned right around and began climbing again. We are duly humbled and will be more hesitant about sticking our necks out again! Yet the principle remains that the current commodities bubble, even including oil, will eventually deflate.

Where we were quite right last week was on the assertion that Bernanke has finally admitted that a weak USD feeds inflation, implying an end to rate cuts and a decent pause in the dollar’s decline. Now a whole international debate has broken out about dual mandates à la Fed (inflation with no specific target plus maintaining employment growth) versus focused mandates à la ECB (inflation with a specific target). There has been a huge shift in professional opinion about the ECB over the last year, from “if only the ECB would loosen the money supply to encourage the economy like the Fed” to “hasn’t the ECB done well to maintain interest rates in an attempt to control inflation, and the economy has not suffered much after all”.

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