ECB president Jean-Claude Trichet suggested on Monday that when money markets do eventually return to normal, the idea of “normal” may be different to pre-credit crunch times.

The difference between central bank policy rates and many inter-bank lending rates remains well above average on both sides of the Atlantic. The three-month Euribor benchmark for Eurozone inter-bank lending, was 4.959% on Monday, compared to the ECB’s policy rate of 4.25%. Before August 2007, the spread was less than  0.2%.

The 3-month rate was 4.147% on June 14, 2007, the day after the ECB hiked its benchmark rate to 4%. Today's Euribor rate is just over the equivalent of 3 typical ECB rate hikes.

Bloomberg said on Monday that banks are becoming more confident about lending, money market rates indicate. The difference between three-month Treasury bill yields and the three-month London interbank offered rate, the so-called TED spread, narrowed to 1.01 percentage point, the least in three weeks.

While Trichet held out the prospect that spreads will eventually narrow, he suggested that the status quo will not return.

 “We might see that we are going back to a normal with a different level of spreads than what we had before the turbulences,”Trichet said at a press conference following a central bankers’ meeting at the Bank for International Settlements in Basel, Switzerland.

The ECB President is suggesting that the old narrow spreads will not return as markets were underestimating the level of risk in the economy.

Higher spreads long-term mean higher funding costs and with the deflationary impact of falling Asian goods' prices at an end, the long-term trends of inflation and interest rates are expected to be above those of the past decade in developed countries.

"After the shocks go through the headline inflation, we have to go back in each economy to the definition of price stability," Trichet also told the press conference and warned again about "second round effects" - price and wage setting in response to energy and food price spikes.

IG Metall, the German engineering workers’ union, on Monday called for a 7 to 8% pay increase, its biggest demand for 16 years.

Also on Monday, the German statistics office Destatis, said that in the second quarter of 2008, employers in industry and in the entire service sector paid a seasonal-adjusted 1.1% more for one hour worked than in the same quarter a year earlier. The two main components of labour costs showed different trends: Gross wages and salaries were up 1.6%. The 0.3% decrease in non-wage costs, however, had a downward effect. This reflects especially the reduction of the employers’ contribution rate for unemployment insurance from 2.10% to 1.65% on 1 January 2008. Compared with the previous quarter, labour costs remained unchanged when seasonally and calendar-adjusted (–0.0%).
 
Destatis said, that at the European level, rates of labour cost change in the private sector of the economy for the first quarter of 2008 show that the costs of one hour worked in Germany was after seasonal-adjustment 2.1% compared with the first quarter of 2007. Following Malta (+2.0%), Germany had the second lowest growth rate within the European Union. The third lowest growth rate was recorded for Sweden (+2.2%), followed by France (+2.5%) and Luxembourg (+2.7%). The highest rate of labour cost change was observed for Latvia (+33.3%). The average increase in the European Union (+4.3%) was markedly higher than in Germany. For the first quarter of 2008, data are available for 21 of the 27 European Union member states. The rates of labour cost change in countries outside the Eurozone are measured in the relevant national currencies and thus are not currency-adjusted.