No Pause, Please

Pressure is building on the European Central Bank to pause from further increases in interest rates after the New Year. The ECB must not give in. So far, the credibility of Europe’s central bank has been sufficient to firmly anchor inflationary expectations. But to pause now when Europe’s economic strength continues at a robust pace carries with it an un-necessary risk to price stability.

Even though 2006 has been an excellent growth year for Europe, real interest rates—interest rates expressed in terms of goods and services as opposed to money—have not budged from the beginning of the year. This means Europe’s monetary policy continues to stimulate economic growth despite the fact that, by December, money rates will have been raised 150 basis points during 2006.

With real rates so low, a pause at the New Year would be pre-mature.

https://prosyn.org/xSF1bys