Thursday, March 5, 2009
Is the ECB Still Worried About Inflation?
As I argued previously, I feel that the Fed should be employing a more aggressive monetary policy in the current economic environment (liquidity trap theories and all). However, we should be thankful that we have Bernanke, and not Trichet running the central bank. The actions taken by the ECB thus far seem mind boggling. The fact that they are still at 1.5% target rate given the extreme adversities facing the Eurozone is amazing and will in hindsight prove to be a massive policy mistake. The weakness associated with the rigidity placed on monetary policy given a diverse set of individual economies under a single currency is rearing its ugly head.
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An inability to appropriately devalue to stimulate exports and the domestic economy is certainly hurting the PIIGS and dragging down the entire Eurozone. These rates are all but slaughtering these members. Perhaps the EU should consider Euro.A & Euro.B currency as the one size fits all is not working so well in times of stress.
We've questioned the BoE's rate decisions for upwards of 6months now, but clearly in terms of currency (keeping the pound)they made the right choice (currency based on specific economic output and conditions) even if for the wrong reasons (historical significance and nationalist pride).
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