Friday, June 10, 2011

While the ECB and the Bank of England kept their rates stable: ECB, BoE and Fed, 3 different central banking philosophies?

Yesterday (June 9), both ECB (European Central Bank) and the Bank of England kept their "central" rates steady! But the difference between them is 75 basis points (Euro 1.25% vs Pound 0.5%, instead of the 50 that changed when the ECB raised its interest rate 25 basus points a couple of month ago (April 7) citing fears of inflationary pressures in the Eurozone (from global oil and food prices hikes).

For context read my post of April 7 2011: "Eurozone: That 2% obsession"!

Yesterday's respective decisions were made in the following context:

Eurozone:
1) 75/2011 - 31 May 2011
Eurostat May 31 release of its flash estimate for May 2011 annual inflation at 2.7%. Down 10 basis points from the 2.8% (annual) in April but way above the ECB's target of 2%.
3) Second estimate (Eurostat, June 8) for the first quarter of 2011 GDP at +2.5% compared with the first quarter of 2010 (same rate for EU).
4) Seasonally-adjusted unemployment rate 9.9% in April 2011, same as in March (Eurostat, May 31)

UK:
1) Annual inflation rate in April at 4.5%, up from 4% in March.
3) Second estimate (Eurostat, June 8) for the first quarter of 2011 GDP at +1.8% compared with the first quarter of 2010 (vs 2.5% in EU as a whole and in the Eurozone).
So the UK had a +1.8% growth (GDP) rate in Q1 vs 2.5% in the Eurozone but its unemployment situation is better than the Eurozone's (7.7% in the 3 months to March vs 9.9% in April) but its industrial producer prices is much higher than the Eurozone (13.1% vs 6.7% in April) and April inflation is 4.5% vs 2.7% in the Eurozone.

The Bank of England seems to have opted to resist the temptation to address the high inflation and industrial producer prices and did not "tighten" (ie raise interest rates, same 0.5% rate for 27 months in a row). In short it opted to growth and jobs (although jobless rate lower than Eurozone's) instead of inflation curbing.

That is the opposite than what the ECB had opted for 2 months ago! But then the ECB is only "responsible" for a 2%inflation target, not jobs or growth (as eg the Fed in the US that has kept is central interest rate at 0% to 0.25% for a long time now)!

Ouch! The ECB sounds like the Terminator robot in the well known series of films that only has one "directive" (order or goal): inflation minimisation. Unlike the Fed and the BoE decision yesterday.

What I do not understand is why the Pres of the ECB had to say anything re next months meeting and decision at all! Correct me if I am wrong, but the only thing the Bank of England "says" is to release, many days later, a record of the vote of its 9 member board.
Oh well.

Mind you, JC Junker, the Pres of the Eurogroup has taken the view (April 20, 2011) 'that "European leaders should discuss monetary policy in private talks", arguing that public discussions feed speculation'

And this week (June 6) Mr. Junker said that “European Central Bank President Jean-Claude Trichet’s proposal to create a euro-area finance ministry “‘won’t work.”". He was speaking to a European Parliament committee meeting and also said that "the euro area has no exchange-rate objective" adding that “I’m more inclined to think that we should have an exchange-rate policy".

Loyal readers of my blog know what my position is on these above issues!
More soon!

Notes:
1) See some economic theory re the 2% inflation target in my post: "Why a 2% inflation target for the Eurozone and other myths & realities!" (March 5, 2011)


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Nick

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