The US Fed is doing it, the Bank of England is doing it, so why is the European Central Bank sitting on its hands and refusing to budge policy interest rates lower? Do they think that the Euro Zone will be largely immune from the credit squeeze? Are they not concerned about the abnormally high value of the Euro against the US dollar which is putting so much pressure on western European exporters? Euro Zone rates have been on hold for a year now.
The answer seems to be that the ECB just cannot get fears of accelerating inflation out of their mind. High food and energy prices have driven up inflation rates around the world. And consumer price inflation in the fifteen member nations of the Euro Zone has climbed to new highs in recent months, touching 3.5 percent in March, well above the ECB’s target of just under 2 percent. The ECB has developed a reputation for putting inflation control first ahead of other concerns and it seems to be worried that inflation remaining stubbornly above the 3 percent level might prompt a wage-price spiral.
Perhaps the problem is that their remit on inflation is simply too narrow and inflexible in these turbulent times.
That said, with consumer price inflation staying high and nominal policy rates at 4 percent, the real interest rate has come down over the last year or so.
Charts in PowerPoint format
Euro_Zone_Interest_Rates.ppt
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Maybe, just maybe, the ECB are right. There are cost-push pressures at the moment, which, of course, may not be cured by interest rate policy. But are the Fed and B of E in danger of fuelling inflation by over expansion of the money supply?
