ECB worried about economic weakness
For much of its short history, the European Central Bank, perched in one of Frankfurt’s highest skyscrapers, has worried about inflationary dangers, earning itself a reputation for monetary hawkishness.
But in a feat rare even in the stable world of central banking, the ECB will next month mark two years since its last interest rate change. And with the eurozone economy slowing again, few expect action any time soon.
Financial markets point to a quarter percentage point increase only in the second quarter of next year – making a third anniversary of no change a distinct possibility.
The long period of inactivity – the ECB last week again left its main rate at 2 per cent – highlights how, for all the central bank’s monetarist instincts, the weakness of European growth is proving more important to the ECB than fears of a possible asset bubble or its desire to follow the US Federal Reserve in moving rates back to more “normal” levels.
An economist at a well-known bank quips that the inactivity is putting European economists out of a job. Even ECB insiders joke that their families ask them what they do all day.
Official rates have been zero in deflation-ridden Japan for years.
Central bank watchers have to go back to the early 1960s to find a comparable period of interest rate stability in the US.
However, the ECB, which took over responsibility for eurozone monetary policy in 1999, has some way to go before it matches the three years and eight months of unchanged rates notched up by Germany’s Bundesbank before it offered financial markets something to talk about in January 1965.
The talk last year was of a possible ECB rate rise by the end of 2004, then the favoured date slipped into 2005. Now any change appears to have been pushed even further into the future by a string of disappointing economic figures.
But a more important reason for its inaction has been the weak data. Eurozone gross domestic product figures this week covering the first three months of this year are expected to show a rebound after a weak second half of 2004. But more recent business and consumer confidence surveys have pointed to a marked slowdown in the second quarter of 2005.
German industrial production data for March yesterday came in below expectations, and a slowdown in the UK and US would further dim eurozone export prospects. Meanwhile, eurozone inflation shows little sign of wandering significantly from the ECB’s definition of price stability – a rate “below but close” to 2 per cent.
One hope for ECB excitement would be if the central bank responded to demands from politicians in Germany and Italy for a cut in rates to boost growth.
Jean-Claude Trichet, ECB president, attempted to rule out such a move last week, describing a cut as “not an option”. The ECB believes lower interest rates would add to the problem of excess liquidity in the eurozone, without boosting growth – and its preference is to raise rates as soon as possible.
Otherwise the consensus view is that the ECB will not be able to indulge its hawkish instincts and raise rates until an economic recovery has become self-sustaining.
But in a feat rare even in the stable world of central banking, the ECB will next month mark two years since its last interest rate change. And with the eurozone economy slowing again, few expect action any time soon.
Financial markets point to a quarter percentage point increase only in the second quarter of next year – making a third anniversary of no change a distinct possibility.
The long period of inactivity – the ECB last week again left its main rate at 2 per cent – highlights how, for all the central bank’s monetarist instincts, the weakness of European growth is proving more important to the ECB than fears of a possible asset bubble or its desire to follow the US Federal Reserve in moving rates back to more “normal” levels.
An economist at a well-known bank quips that the inactivity is putting European economists out of a job. Even ECB insiders joke that their families ask them what they do all day.
Official rates have been zero in deflation-ridden Japan for years.
Central bank watchers have to go back to the early 1960s to find a comparable period of interest rate stability in the US.
However, the ECB, which took over responsibility for eurozone monetary policy in 1999, has some way to go before it matches the three years and eight months of unchanged rates notched up by Germany’s Bundesbank before it offered financial markets something to talk about in January 1965.
The talk last year was of a possible ECB rate rise by the end of 2004, then the favoured date slipped into 2005. Now any change appears to have been pushed even further into the future by a string of disappointing economic figures.
But a more important reason for its inaction has been the weak data. Eurozone gross domestic product figures this week covering the first three months of this year are expected to show a rebound after a weak second half of 2004. But more recent business and consumer confidence surveys have pointed to a marked slowdown in the second quarter of 2005.
German industrial production data for March yesterday came in below expectations, and a slowdown in the UK and US would further dim eurozone export prospects. Meanwhile, eurozone inflation shows little sign of wandering significantly from the ECB’s definition of price stability – a rate “below but close” to 2 per cent.
One hope for ECB excitement would be if the central bank responded to demands from politicians in Germany and Italy for a cut in rates to boost growth.
Jean-Claude Trichet, ECB president, attempted to rule out such a move last week, describing a cut as “not an option”. The ECB believes lower interest rates would add to the problem of excess liquidity in the eurozone, without boosting growth – and its preference is to raise rates as soon as possible.
Otherwise the consensus view is that the ECB will not be able to indulge its hawkish instincts and raise rates until an economic recovery has become self-sustaining.
May 11, 2005
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