The ECB and the BoE stay put

Escrito el 9 mayo 2008 por Gonzalo Garland en Uncategorized

As was expected by most analysts, the European Central Bank and the Bank of England kept their reference interest rates unchanged at 4 and 5% respectively. This is clearly a different path than the one we have seen in the United States, where the Federal Reserve has decreased interest rates aggressively in recent months. These different monetary policies showcase the different priorities central banks on both sides of the Atlantic have in the constant dilemma of deciding whether to fight against inflation or fight against weak growth.

The Federal Reserve is clearly more concerned about sluggish growth and the threat of a recession, than to reducing inflation, which is also relatively high because of the impact of high energy prices and increasing prices of other commodities including food products. In Britain and in continental Europe, in contrast, priority is given to the fight against high inflation, even in a context of slower economic growth. At this point it seems likely that neither European bank will lower interest rates before the end of the summer, when there are expectations that inflation may start to fall.

With these different policies, it is not unlikely that we will start hearing voices from across the Atlantic demanding more aggressive policies, based on the thought that Europe would not be helping the United States, or indeed the whole world, in its recovery from the present slowdown. The intensity of these calls may well depend on the future evolution of the US economy, given that the data released last week still showed growth, albeit slow, in the world’s largest economy.


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