Out of Step at the ECB

In the midst of the most serious financial crisis in recent memory, the ECB refuses to cut interest rates, and even continues to insist that it might raise them. That is an unconvincing bluff, but one that reflects the predicament in which the ECB finds itself after leaving interest rates too low for too long.

The European Central Bank remains seriously out of step with other key central banks in the industrial world despite recently announced coordinated efforts to increase short-term liquidity in the banking system. The United States, Canada, and the United Kingdom all have cut interest rates recently. But the ECB holds firm against cutting; indeed, after the Governing Council’s December meeting, ECB President Jean-Claude Trichet said that some members were in favor of raising rates.

Who are they kidding? Everyone knows that the ECB cannot raise interest rates now, and for some time to come. In the midst of the most serious financial crisis in recent memory, the ECB has resorted to an unconvincing bluff, because it has an inflationary expectations problem.

Past policy missteps are responsible for the ECB’s present predicament.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/YnW5oGK;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.