The European Central Bank’s determination to press ahead with interest rate rises has been defended by a top policymaker, even after the escalation of the eurozone debt crisis in Ireland and Portugal, two of the region’s weakest members. Writing in the FT, Jürgen Stark, ECB executive board member, argues a “one size fits all” monetary policy ultimately benefits all members. He says the eurozone’s weakest countries receive exceptional support on a scale not possible if they were not part of Europe’s monetary union.
Mr Stark’s comments will cement expectations that the ECB will react to rising eurozone inflation by lifting its main interest rate by a quarter of a percentage point next week. The move, flagged by ECB president Jean-Claude Trichet this month, will put the central bank ahead of the US Federal Reserve and Bank of England in embarking on tighter monetary policy. Read more
Compare and contrast economic sentiment across Europe, and you will see different and diverging pictures. (Divergence, of course, is not useful in a monetary union.)
Figures released by the European Commission show that confidence fell in March in the eurozone, while holding steady in the wider EU. It is the first substantial fall in confidence for the eurozone since May of last year, the time of the Greek bail-out, though levels remain far higher (see chart, right). Sentiment worsened in most European countries, with a few larger economies pulling ahead.
Martin Weale, one of the external members of the Monetary Policy Committee gave a speech last night, which was fascinating for anyone interested in the presentation of monetary policy in an uncertain world.
Policy. Regarding the UK interest rate debate, he did not have much to say, save for reiterating that CPI inflation looks likely to get close to 5 per cent. He also had a powerful argument for the Bank staff who fret that its reputation might be damaged if it raised interest rates only to discover this was wrong and had to subsequently reverse the decision. Though that scenario would be bad for the Bank’s credibility, it would also be bad to use this concern to avoid an interest rate rise only to find subsequently that it was warranted, Mr Weale said.
Uncertainty. But the comments on monetary policy were a side show in the talk to the much more meaty discussion of how to present uncertainty in economic forecasts in a way that demonstrates accurately the state of knowledge about the future, which is greater than zero but far from complete.
Mr Weale’s contribution was to suggest we split the known unknowns – arguments over theory, some model parameters and judgments on things like the right future oil price assumption – from unknown unknowns – stuff that happens. Read more
Economic sentiment in Cyprus fell sharply in the month to March, helping the small eurozone nation to keep its unenviable position of second-from-last in the sentiment stakes. (Last is Greece.)
The banking sector probably isn’t helping. In a report last week, ratings agency Moody’s estimated that about €2.7bn would be needed to recapitalise the banks if assumptions made in stress tests materialised. Compare that to the €500m fund announced on Monday by Cyprus bank governor Athanasios Orphanides and your economic sentiment might dip a little, too. Read more