by Jerome a Paris
Thu Dec 1st, 2005 at 06:50:30 AM EST
I write this a couple of hours before the European Central Bank is due to announce what is expected to be the first increase in its main interest rate in almost 3 years, from 2% to 2.25%. Update [2005-12-1 8:25:59 by Jerome a Paris]: This is indeed what it has done. The euro is down half a percent against the dollar.
There has been a lively debate whether this is justified (to fight inflation) or premature (it risks killing off the current tentative growth recovery in the eurozone).
On the hawkish side: the Economist (Why Europe's monetary policy needs to tighten and Japan's doesn't), the WSJ (sorry, no link) and, slightly surprisingly, Le Monde (One quarter point is enough).
On the doveish side, most of the economy and finance ministers of the eurozone and, also slightly surprisingly, the Financial Times (Martin Wolf: Caution would endanger a recovery).
So, what's your take? I have put up a few interesting graphs below the fold to help you decide!.
From an earlier article in the Economist (Haughty indifference, or masterly inactivity? - Monetary policy in the euro area has been looser than critics think):
A widely used test of the tightness of monetary policy is the Taylor rule, which calculates the “correct” interest rate according to the amount of spare capacity in the economy and the deviation of inflation from its desired target. What does it say about interest rates in the euro area? Calculations by David Mackie, of J.P. Morgan, show that virtually throughout the past six years, interest rates in the euro area have been lower than a Taylor rule would have prescribed (see right-hand chart), refuting the popular wisdom that the ECB cares less about growth than does the Fed.
The graph provided in the Martin Wolf article linked above suggests the same:
Real interest rates have been negative in Europe in the last couple of years, which is hardly a sign of a hardline Central Bank.
The market consensus seems to be that the ECB will increase rates to 2.5% (i.e. another increase after today's) in 2006, and will stop there, a small sign of hawkishness agaisnt inflation, but hardly enough to cause any economic pain, and I think this would be a reasonable thing to do.