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With a rate hike, Jean-Claude Trichet may be condemned to repeat past

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Why Trichet may be taking the wrong path "Those who cannot remember the past are condemned to repeat it." George Santayana

Could it be that Jean-Claude Trichet has so soon forgotten 2008?

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The chief of the European Central Bank, eager to prove how tough he can be on inflation, surprised markets today with a warning that he could hike his benchmark rate as early as next month.

The last thing Europe needs at this point is a rate hike, and it appears there is much Mr. Trichet cannot remember.

You'd be tempted to think he cannot remember that the continent is gripped by a debt crisis, and boosting his policy rate from1 per cent would drive up borrowing costs for those who can ill afford it in this post-crash era. Or that he cannot remember that Greece and Ireland needed a bailout, and that Portugal could still be next.

You'd also be tempted to believe that Mr. Trichet cannot remember, though the numbers were released just two days ago, that unemployment in the euro zone is 9.9 per cent. Almost 16 million people are without work in the 17 nations that share the common currency. And that for young people under the age of 25, the jobless rate is almost 20 per cent, meaning one in five of Europe's next generation can't find work. Or that in Spain, unemployment has topped 20 per cent, and the youth jobless rate is a stunning 43 per cent.

What Mr. Trichet does remember is that the latest estimate puts inflation in the euro zone at 2.4 per cent, and he's going to do his damndest to snuff it out.

I'm not alone here in suggesting that Mr. Trichet would be wrong.

"We have argued that a rate hike now would be a policy error, with fiscal tightening, a fragile banking system and the continued concerns over sovereign credit all likely to contribute to slower growth," said Avery Shenfeld, chief economist at CIBC World Markets.

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"The euro has pushed stronger today, and further gains would threaten exports which were the key source of growth in [the fourth quarter]. But the ECB has made a similar error as recently as mid-2008, when it hiked just as the global recession was getting underway, and Trichet recently boasted about that move as an appropriate response to inflation risks.

"While an April rate hike could end up being a similar isolated error, followed by a long pause as growth slows, expectations for a more generous short end yield will delay our call for euro weakening, and might also impact expectations for the timing of moves by the [Bank of England] or the Bank of Canada to some extent."

Economist Benjamin Reitzes of BMO Nesbitt Burns agreed a rate hike at the next meeting might not be the smartest move.

"They are clearly concerned about the potential for second round effects from the rise in commodity prices, and similar to the July 2008 rate hike, the bank appears eager to prove its inflation-fighting credentials," Mr. Reitzes said.

"However, considering the sovereign debt crisis has yet to be resolved and much of Europe, outside of Germany and France, are struggling mightily, a rate hike is a risky move."

Economist Jonathan Loynes of Capital Economics cited the "relative strength" of the euro zone economy, but warned such a move could be a blow to the weaker members, adding to the risk surrounding the future of the monetary union.

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Nor can Mr. Loynes see the reasoning, given that the central bank's staff forecasts for inflation are not that troubling.

"Still, the EBC's traditionally hawish instincts and the recent strength in the aggregate economic data appear to have persuaded a majority of council members that action is now needed," he said.

"There must be a suspicion too, though, that the bank wanted to send a signal ahead of the coming EU summit on the so-called 'Grand Bargain' that it is not prepared to set monetary policy to support the peripheral economies while European policy mackers continue to dither over a solution to the fiscal crisis."

Food prices rise again Global food prices continue to hit record highs, and elevated oil prices so crucial to farmers and shippers are adding to the concern.

Food prices rose in February for the eighth month in a row, up another 2.2 per cent, the Food and Agricultural Organization of the United Nations said in a report today. Prices rose in all the commodity groups measured, but for sugar.

This comes amid a feared tightening of the world's cereal supply. There are also concerns that high oil prices could prompt farmers to plant more corn, which can be converted into ethanol, taking away the incentive for more needed crops.

"Unexpected oil price spikes could further exacerbate an already precarious situation in food markets," David Hallam, director of the agency's trade and market division, said in a statement.

"This adds even more uncertainty concerning the price outlook just as plantings for crops in some of the major growing regions are about to start."

High food costs and unemployment have been catalysts in the popular uprisings in the Middle East and North Africa.

Gartner revises PC outlook The rise of the tablet computer popularized by Apple Inc. is expected to take an increasing bite out of demand for PCs.

Gartner Inc. today cut its forecast for PC sales for this year and next based on projections of weaker demand for mobile consumer PCs such as laptops and netbooks, notably in China but also in the broader market.

Gartner, an IT research and advisory firm based in Stamford, Conn., now projects global PC shipments of 387.8 million units this year. While that preliminary forecast marks a 10.5-per-cent increase from last year, it's down from an earlier projection of 15.9 per cent.

For next year, Gartner sees a 13.6-per-cent gain to 440.6-million units, but that's down from its earlier forecast of 14.8 per cent.

"We expect growing consumer enthusiasm for mobile PC alternatives, such as the iPad and other media tablets, to dramatically slow home mobile PC sales, especially in mature markets," said Gartner research director George Shiffler.

"We once thought that mobile PC growth would continue to be sustained by consumers buying second and third mobile PCs as personal devices. However, we now believe that consumers are not only likely to forgo additional mobile PC buys but are also likely to extend the lifetimes of the mobile PCs they retain as they adopt media tablets and other mobile PC alternatives as their primary mobile device. Overall, we now expect home mobile PCs to average less than 10-per-cent annual growth in mature markets from 2011 through 2015."

Mobile PCs have been a "dynamic growth engine" of the PC market for the past five years, Gartner said, noting average annual increases of almost 40 per cent as consumers used it as their choice for the Internet.

That's changing, though, prompting Gartner to revise its outlook not only because of the rise of the iPad, but also because of the limitations of the PC.

Potential PC buyers appear to be hestating as well, Gartner said, awaiting new tablets this year.

Indeed, just yesterday Apple unveiled its slimmer, faster iPad 2, while Research In Motion Ltd. , for example, is poised to launch its PlayBook.

"Not too long ago, PCs were a 'fashion accessory' in mature markets with vendors linking themselves to fashion designers and even creating PCs specifically for women," said Gartner.

"The current 'cool' device is the smart phone, and now PCs will soon have to do battle with media tablets when they are launched in large numbers in the second quarter of 2011. Up to now, the appeal of mobile PCs has been their portability. But mainstream mobile PCs have not shed sufficient weight, and do not offer the all-day battery life, to substantiate their promise of real mobility.

"These limitations have become all the more apparent with the rapid spread of social networking, which thrives on constant and immediate connections. In short, all-day untethered computing has yet to materialize, and that has exposed the 'mobile' PC as merely a transportable PC at best."

Banks on an earnings roll Canada's banks are on a roll, beating expectations for first-quarter earnings by hefty margins, Globe and Mail banking writer Grant Robertson reports today.

Royal Bank of Canada , the biggest in the country, posted a 23-per-cent rise in quarterly profit to $1.84-billion or $1.24 a share, compared to $1.5-billion or $1 a year earlier. Cash earnings per share, which excludes one-time items, came in at $1.26, well above the $1.01 expected by analysts.

"Overall, we expect [RBC] to trade at a premium given its dominant position in Canadian financial services," said National Bank Financial analyst Peter Routledge. "However, the prospect of volatile capital markets revenues and capital intensive wealth management acquisitions should cap [RBC's] premium valuation over the medium-term, in our view."

As The Globe and Mail's Tara Perkins reports, Toronto-Dominion Bank also topped estimates today, and added a little more for shareholders with a 5 cent hike to its dividend to 66 cents.

TD posted first-quarter profit of $1.54-billion or $1.69 a share, up from $1.3-billion or $1.44. Adjusted for unusual items, profit was $1.74 a share, topping the $1.54 analysts expected.

"We believe the stock remains a very good value for investors, particularly in light of the strong performance in the U.S.," Mr. Routledge said.

Alberta nabs mining crown Not only is it home to the oil patch, but Alberta can now boast it holds the top spot in the Fraser Institute's survey of the world's most attractive regions for mining exploration and development.

"Alberta's resource-friendly government, competitive taxation regime, and superior infrastructure render the province a standout for mining investment, not only in Canada but also globally," Fred McMahon, co-ordinator of the think tank's Survey of Mining Companies, said in releasing the report today.

Quebec had held top spot in the global rankings for three consecutive years, but dipped to be topped not only by Alberta, but also Nevada and Saskatchewan.

"Quebec damaged its reputation when the government proposed tax increases last spring and tabled a bill amending the provincial mining act in December 2009," Mr. McMahon said in a statement accompanying the survey of almost 500 companies.

"These variables rocked miners' confidence in the province and we see the result with the drop in rankings."

Canadian Natural boosts dividend Canadian Natural Resources Ltd. today hiked its quarterly dividend by 20 per cent, to 9 cents, even as it posted a fourth-quarter loss.

The energy company lost $416-million or 38 cents a share in the quarter, falling from a profit of $58-million or 53 cents a year earlier. Adjusted net earnings from operations were $618-million or 57 cents, up from $606-million or 55 cents.

"Canadian Natural reached a milestone in 2010 as we achieved an overall record yearly production level of over 632,000 barrels per day of oil equivalent," said chairman Allan Markin.

"In addition, we increased our total proved plus probable company gross reserves by 9 per cent to 6.9 billion barrels of oil equivalent, replacing 341 per cent of our 2010 production and providing us a strong base of reserves with significant upside potential for years to come."

CIBC cuts CPR target Canadian Imperial Bank of Commerce has cut its price target on shares of Canadian Pacific Railway Ltd. after the unexpected retirement of Ed Harris, the executive vice-president of operations and the driver behind a recent efficiency push.

CP announced late yesterday that Mr. Harris, 61 and on board since only last year, is retiring at the beginning of April, and will be replaced by Mike Franczak, 48, the senior vice-president of operations.

"We believe the unexpected retirement of Mr. Harris (COO) increases the risk CP will fail to deliver on its operating performance targets," analyst Jacob Bout said as he cut his target to $74 from $78.

"CP is targeting an operating ratio in the low-70 per cent range within the next three to five years. We believe Mr. Harris was spearheading much of the recent network efficiency initiatives at CP, and to that extent, the company's ability to achieve its targeted operating ratio was pinned on Mr. Harris," he added.

U.S. jobless claims fall As senior economist Jennifer Lee of BMO Nesbitt Burns put it, "fingers crossed" on the U.S. jobs crisis.

Her comments followed the government's report showing initial jobless claims fell during the week of Feb. 26 to 368,000, the lowest reading since mid-2008. The four-week moving average is also at its lowest in more than two years.

Weston profit climbs Canadian food giant George Weston Ltd. posted a jump in fourth-quarter profit to $101-million or 70 cents a share from $82-million or 56 cents a year earlier. Sales, though, dipped to $7.4-billion from $7.5-billion.

Boyd Erman's Morning Meeting Investors are going to have to get used to a bouncy ride from RBC's capital markets earnings, as the bank's high proportion of trading revenues yo-yo, Streetwise columnist Boyd Erman writes today.

In Economy Lab today

Canada trails the U.S. and the rest of the world in having strategies for developing women leaders, The Globe and Mail's Tavia Grant writes.

Here are two economic indicators of a different sort: The price of meals (that means something in France) and the amount of driving (that means something in the United States).

In Personal Finance today

Tax Matters columnist Tim Cestnick offers some good advice on how to lower your taxes if you can't collect what's owed to you.

The mutual fund industry is good at charging fees but not so good at revealing them to investors, writes Rob Carrick, who has some ideas for increasing their transparency.

Ever been caught in a sticky money situation and unsure how to resolve it? Angela Self weighs in with some advice from a pro.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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