Why an interest-rate hike would mean a recession

The ECB's Jean-Claude Trichet caused a stir when he said he would raise interest rates. Other central banks would likely follow suit, but the effect on the global economy could be damaging.

Has Jean-Claude Trichet, president of the European Central Bank (ECB) assumed the role of the world's most important central banker? Certainly his explicit comment regarding the strong likelihood that regional base rates might have to rise as early as July set the house on fire, prompting an immediate and aggressive response from senior US officials including the president himself.

Fearing that the consequence of higher European rates would be to drive the euro higher against the dollar (or the latter into further freefall against the euro, having already depreciated by c40% over the past four years), US big hitters came out swinging. Mr Bush, Mr Paulson and Dr Bernanke have all gone on record over the past few days to warn that rising inflationary pressure might have to prompt a monetary response.

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