European Central Bank likely to cut interest rates

8th December 2011

How times have changed since the spring

If we recall in the spring/early summer of this year the ECB raised interest-rates twice by 0.25% and therefore raised from 1% to 1.5%. Indeed it was only on the 7th of July of this year that it made the latter upwards move and told us this:

Upward pressure on inflation, mainly from energy and commodity prices, is also still discernible in the earlier stages of the production process. It remains of paramount importance that the rise in HICP inflation does not translate into second-round effects in price and wage-setting behaviour and lead to broad-based inflationary pressures. Inflation expectations must remain firmly anchored in line with the Governing Council's aim of maintaining inflation rates below, but close to, 2% over the medium term.

At that meeting the inflation rate in the Euro zone was 2.7% and it is now 3%. So what happened to the philosophy of setting interest-rates to control inflation you may ask? You may also ask what happened to the independence of the ECB as it has always been very strong on inflation control but now seems to be kow-towing to the objectives of its political masters.

Care is needed here as at the time of the interest-rate rises I pointed out that they were clearly inappropriate for Greece Ireland and Portugal and maybe one or two others such as Spain and Italy. But of course in a 17 nation currency you are going to be incredibly lucky if you can make a move to suit everyone…..So like virtually every discussion on the Euro zone these days you find yourself at the thorny topic of the failure to achieve fiscal union.

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