The most surprising and controversial thing about last December’s rate hike by the European Central Bank was that, after two and a half years of keeping interest rates at exceptionally low levels, the bank ventured an increase of only 25 basis points with no promise of more to come. Political pressure on Europe’s central bank may be the reason for that timid move.
Jean-Claude Trichet, the current ECB president, may be in the same job but not the same environment as his predecessor Wim Duisenberg, who famously remarked, “I hear the politicians, but I don’t listen.” Political pressure on the ECB today is much greater than in Duisenberg’s time. The political environment is much more hostile. Some of this pressure may be seeping through and affecting ECB policy decisions.
This is an extremely negative development – and one of the central bank’s biggest challenges for 2006. Not only will politicians’ influence be towards monetary excess, which of course is a serious enough matter for a bank whose primary mandate is price stability, but also the excess will constitute a serious barrier to structural reform, which is essential for European prosperity in a competitive global economy.
The most surprising and controversial thing about last December’s rate hike by the European Central Bank was that, after two and a half years of keeping interest rates at exceptionally low levels, the bank ventured an increase of only 25 basis points with no promise of more to come. Political pressure on Europe’s central bank may be the reason for that timid move.
Jean-Claude Trichet, the current ECB president, may be in the same job but not the same environment as his predecessor Wim Duisenberg, who famously remarked, “I hear the politicians, but I don’t listen.” Political pressure on the ECB today is much greater than in Duisenberg’s time. The political environment is much more hostile. Some of this pressure may be seeping through and affecting ECB policy decisions.
This is an extremely negative development – and one of the central bank’s biggest challenges for 2006. Not only will politicians’ influence be towards monetary excess, which of course is a serious enough matter for a bank whose primary mandate is price stability, but also the excess will constitute a serious barrier to structural reform, which is essential for European prosperity in a competitive global economy.