Daily Archives: May 10, 2012

Claire Jones

Seldom are statements of the obvious as significant as the Bundesbank’s comments yesterday that Germany might well have to tolerate higher inflation than the rest of the eurozone in the coming years.

Jens Weidmann often cites the EC Treaty’s prohibition of monetary financing as an argument against stepping up the European Central Bank’s purchases of government debt.  It would be hypocritical for the Bundesbank president to argue against what is also implicit in the legislation that governs the ECB: that the governing council sets monetary policy for the eurozone as a whole, not individual member states.

Above-target inflation is the natural result of Germany’s position as the bloc’s strongest economy at a time when the divergences between member states’ fortunes are becoming more and more pronounced.

Still, from a central bank more aware than most of the social and economic carnage that accompanies the debasement of currencies, the Bundesbank’s acceptance that higher inflation is a price that it must pay as part of its commitment to monetary union is to be welcomed. Read more

For the first time in quite a while, the Monetary Policy Committee of the Bank of England has today made a knife-edge decision which genuinely might have gone either way. The outcome, which was to leave the total of quantitative easing unchanged at £325bn, tells us something about the inflation fighting credentials of the MPC, which have been widely questioned in the financial markets. And it also tells us something about the way in which other central banks, including the Fed, might react to similar, if less strained, economic circumstances in coming months.

The Bank of England has been on a mission in the past two years. That mission has been to participate, possibly a little too enthusiastically at times, in a plan to change the fiscal/monetary mix in the UK, and to support the Coalition’s plan to reduce the budget deficit on an accelerated timsescale. The MPC has therefore delivered the largest dose of monetary easing among the major economies, and has acquiesced to a prolonged period in which UK inflation has exceeded targets by very significant amounts. From my vantage point, while inflation and unemployment have both been far too high, there were few better policy options available at a time of enormous difficulty for both the Treasury and the Bank.

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Claire Jones

Fears over inflation remaining stubbornly high have won out and the Bank of England’s Monetary Policy Committee has today opted to stay put, rather than plump for more money printing.

Most had expected the decision, though a few had thought a combination of concerns over weak economic activity and sterling’s recent surge would force the MPC to act. Read more