Thursday, 6 March 2014

Masterly inactivity

Last year’s lurch down in inflation put the European Central Bank (ECB) in an awkward spot. Once the ECB had lowered its main lending rate to a new low of 0.25%, which it did in November, any further meaningful easing in monetary policy to combat undesirably low inflation would require radical measures such as quantitative easing which would split the governing council. Given the opposition to unconventional policies by central bankers from the northern core of the euro zone, led by Jens Weidmann, the head of the German Bundesbank, there was a case for watching and waiting.

And that is precisely what the ECB led by Mario Draghi is doing, to the discomfort of those calling for more monetary stimulus. Today the central bank again kept interest rates on hold and made no other changes, such as to its liquidity policies. Its forward guidance retains a bias to easing by stating that its interest rates will remain at present or lower levels for an extended period. But unless there is a further collapse in inflation the ECB seems likely to hold its fire throughout 2014. The big guns–aggressive policies like charging negative interest rates on deposits made by banks at the ECB–may have been primed, but they will remain silent.

Recent economic figures have bolstered...Continue reading

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