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|ECB - No Interest Cuts For Now|
Corriere della Sera - January 28th 2008
For central bankers these days, it is a matter of pride to be able to stand up and ignore pressure from two sorts of directions: pressure from politicians, who are by definition reckless, and pressure from stockmarkets, who are by definition over-emotional. That is why Jean-Claude Trichet, the president of the European Central Bank, has this week been so determined to say that the ECB is not going to follow the Federal Reserve in
The basic statistics support Mr Trichet’s position.
That is fair enough. But all these statistics refer to the past, not the future. The dramatic interest rate cut by the Fed suggests that it believes that the future is going to be tougher and much less inflationary in America than the recent past: in America, there has only been one month of rising unemployment and inflation remains officially at 4%, but the Fed seems to think that consumer spending is dropping sharply, that more losses in banks and insurance companies are on the way, and that deflation is as much of a danger as inflation.
If that prediction by the Fed is right, then
No one can foresee the future accurately. Central banks have the difficult job of trying to manipulate people’s expectations about the future, by which is meant expectations of future inflation, while at the same time trying to anticipate the future of real economic activity themselves. It takes many months before a cut or an increase in interest rates has an effect on companies and consumers, so central banks do have to attempt to foresee what is going to happen.
The European Central Bank may be right to talk tough now. It can carry on talking tough until