The ECB's "vigilance against inflation"
As The European Central Bank chooses to hold interest rates steady this thursday I can only agree. I for one don't think the eurozone will be able to take too many hikes if a recovery truly is on the wishlist. The last time Trichet chose to raise the rates to its current 2.25% we were all over him saying ECB was too hawkish on inflation and essentially that his move risked to thwart European growth. Edward Hugh over at AFOE questioned whether the december raise was The Most Bizarre Monetary Policy Decision Of Recent Times? and I also questioned whether Trichet had made a smart move as did NewEconomist; The ECB finally raise rates - but should they have?
What became of all that discussion the last time Trichet and the ECB were run through the shredder? Well, I still believe this Economist article ("Trichet's dilemma") nailed the issue of the ECB and how to manage its interest/currency regime;
"The bank is trying to establish its credibility as an inflation hawk, but this may be hard to do without endangering the fragile recovery in some of the euro zone’s biggest economies."
So what has changed this time?
The obvious change is that the ECB has chosen to hold interest rates steady this time ...
"The European Central Bank held its key interest rate steady at 2.25 percent on Thursday and said conditions for sustained growth in the euro zone remain in place, but made no indication about future rate increases."
But in the midst of this apparent end of the ECB interest rates hikes the rhetorics remain the same and all this "vigilance against inflation" talk is making me weary.
"We have to be vigilant, there is no complacency'' on inflation expectations, Trichet said in an interview in Vallendar, Germany. ``The working assumption of growth going progressively close to potential, around potential, has been confirmed. We remain pragmatic and respectful of facts and figures.''
We all know that CBs finest job is to keep inflation at bay and with short term interest rates as their only weapon this is perhaps the only thing they are good for? However, CBs have a lot more power and inflation comes in many shapes and sizes; i.e the discussion on Greenspan and his "low interest regime's" affect on the asset bubble mirrored i this week's issue of the Economist. In Europe the ECB is faced with two major issues; 1) the Eurozone consists of countries with very different growth rates and 2) as described above, the trade-off between estabilishing the ECB as an inflation fighter and stimulating growth at the same time.
Lastly, I ask two questions; How responsive will the ECB be towards potential "inflation rising" news like for example how European retail sales are rising at a steady rate? And ultimately, how far should the ECB go in order to prove its inflation fighting ambitions and credibilities? - Not too far if you ask me.