Thursday, February 9, 2012

9/2/2012: ECB rate decision

So we have ECB keeping rates at 1%... which relates to:

1) growth:
So with growth leading indicator stuck for the 4th month in a contraction territory, 1% repo rate is a bit too high, given we are now into the second leg of recession judging by leading indicators.

2) inflation:
So with inflation still anchored well ahead of 2% bound, that 1% repo rate is a bit too low for the ECB mandate, unless the ECB expects rapid de-acceleration of prices.

And in case you wonder, the pull on policy side comes from divergent growth/inflation dynamics:


And thus we have: ECB latest decision is inconsistent with either inflationary or growth signals. You might say that on average, that makes ECB policy balanced. Or you might want to say that this mismatch reflects monetary union internal inconsistency. Or both... take your pick.
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