Thursday, March 31, 2011

Risks for ECB optimists on road to recovery

Financial Times
March 31, 2011

Prematurely spotting light at the end of a tunnel, blooming landscapes after an economic crisis or the green shoots of a recovery – only to recant later – is an occupational risk for central bankers as well as politicians. Some outside its home city of Frankfurt might think the European Central Bank is about to make just such a mistake.

Recent comments by ECB policymakers, who are convinced the eurozone economy overall is growing steadily, have made clear that a quarter percentage point rise in the central bank’s main interest rate to address inflation is all but certain when its governing council meets next Thursday. Seemingly overlooked is the impact on eurozone countries such as Spain, Portugal, Greece and Ireland, all still reeling from tumbling economic activity, unemployment, bank crises or severe fiscal austerity programmes.

Adding to the apparent incongruity of next week’s move, the ECB continues to meet, in full, banks’ demand for liquidity – its version of US-style “quantitative easing” – as it has since the collapse nearly three years ago of Lehman Brothers.

Overshadowed by his hints about interest rates, Jean-Claude Trichet, president, announced earlier last month the ECB would continue to provide unlimited loans of up to three months’ duration until at least early July. The reason was the weakness of much of the eurozone bank sector, above all in Ireland.


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