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December 02, 2005

The ECB Plays Its Hand Weakly?

Edward Hugh thinks so, and notes a key element of the ECB's post-decision statement that I basically ignored in my previous post:

Perhaps the most significant among the many comments was not the observation from Dominique de Vllepin’s politically correct “My belief is that the ECB wouldn’t do anything that would compromise economic growth in the EU.” but rather Christian Noyer - Governor of the Bank of France - saying “we don’t have anything else in our pocket for now……it’s not forecast that it’s the beginning of the cycle.”

I believe Edward thinks it is still too early to declare US monetary policy the unqualified success I implied...

Exactly, what has happened since the 1st November, well, at the risk of being a pain, I would say that the threat of a yield curve inversion in the United States has increased significantly - with the disconnect between US and eurozone growth as the driver - that is what has happened.

... and the ECB decision was misguided as a matter of both policy and strategy:

My own view is that this has been an extremely foolish move on the part of the Bank, and... they are playing with fire here (as is incidentally and on the other side of the planet the Bank of Japan). If they have read the tealeaves badly (and I think they have) and if the German data fail to improve and the Italian data turn downhill again (which I think might well happen) then this may be the last time the ECB will dare to make a decision which isn’t approved of by the finance ministers first.

So was this a balanced risk? Was it wise - or even, god forbid, prudent - to try and call the shots when only a quarter point is in play. I think not. If I was going to make a risky call, one which could threaten my long term independence methinks I would want to do it for something a bit more substantial.

It's an excellent post.  Read the whole thing.

UPDATE: More, at A Fistful of Euros, and from the New Economist.

December 2, 2005 in Europe | Permalink


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» The ECB finally raise rates - but should they have? from New Economist
After leaving interest rates unchanged for more than two years, the European Central Bank yesterday raised official interest rates by 25 basis points to 2.25%. The decision has sparked some interesting reactions. European share prices have rallied, the... [Read More]

Tracked on Dec 3, 2005 10:55:15 AM


Do you think that they are increasing rates out of necessity? They seem to favor a strong euro, and they must be feeling inflationary pressures from the rise of commodity prices. With the BOJ raising rates because their economy is finally starting to show a spark, and the US raising rates, they may feel that to keep some sort of equilibrium they need to raise rates to keep pace.

Instead, they should cut taxes, cut government spending, and let the makrets work. Then they might be accused of being capitalists and no good european wants to be known as that!

Posted by: jeff | December 02, 2005 at 10:14 AM

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