ECB inertia threatens the slow lane

Central banks in the USA and the UK are cutting interest rates as credit crunch 2.0 takes hold. But the European Central Bank is holding firm with official rates at 4 per cent despite mounting evidence that the surging Euro-dollar exchange rate is hitting investment, exports and growth prospects. Why the inertia? And is the ECB so firmly fixated on the altar of price stability that it is prepared to allow the Eurozone economy to tumble into a growth recession thus putting the future of the single currency area under theat?

The case for sizeable and immediate cuts in Eurozone interest rates has been diminished by the latest news on consumer price inflation in the fifteen member nations of the currency union. Inflation in the twelve months to the end of February jumped to a 14-year high of 3.3 per cent - the main culprits being higher food and fuel prices. This is well above the ECB’s inflation target of 2%.
In some countries, CPI inflation is noticeably higher than this, for example price inflation in Spain is over 4.5%. Inflation is very high in several of Europe’s new member states, although these countries are not yet members of the currency union.

So there is little sign that the ECB will sanction a reduction in interest rates to provide a boost to the weakening growth picture in many of Europe’s leading economies. With the US Federal Reserve cutting interest rates in aggressive fashion, it is little wonder that the dollar has continued to slide against the Euro. A strong currency is good for holding down inflationary pressures in the Eurozone because it helps to reduce the prices of commodities and other imports priced in dollars. But export industries are starting to feel the squeeze. This BBC news av clip looks at some of the problems facing German exports