Thursday, March 8, 2012

8/3/2012: ECB - policy dilemma remains

Much has been said, following today's ECB rates decision, about 'reappearing' inflation. Alas, much of that is, in my view, pure invented excuse. Inflation, if anything, is currently moderating - still well above the target, but declining. It his 2.7% in May-June 2011, then 3.0% in September-November and is running at 2.5-2.4% now (by my estimates for February). January inflation was the lowest since August last year.

While I personally think that we are facing inflationary pressures in medium term future, I don't see the urgency for tightening monetary policy today or for holding rates at 1%, unless one is to think that liquidity injected via LTROs into the banking system will start percolating into the real economy. The latter is unlikely to happen any time soon, in my view.

So what does the latest decision tell us about the ECB policy direction? Not much, if we are to go by the numbers. Instead, the latest decision continues to reinforce what I would term policy 'psychosis' - the situation whereby the ECB is clearly stuck between two targets (one acknowledged, aka inflation, another implicit, aka economic growth).

Charts illustrate:

First consider leading growth indicator and the relationship to ECB repo rate:

Growth conditions in the euro area clearly suggest rates at below 1%.

Now - inflation:

Inflation conditions clearly point to rates well above 2%.

I've highlighted this policy dilemma before and so far, there is nothing that has changed. So it's not about 'inflation threat' and it is not about 'growth support' - the ECB policy appears to be a clawback on LTROs...

Post a Comment