Thursday, March 02, 2006

ECB Rate Hike-Too Little, Too Late

So, the ECB raised short-term interest rates for the second time in the last 4 months. While rate hikes are understandably not popular among people with large debts -including governments-, they are certainly necessary today given that rates was so artifically supressed in the first place. Indeed, the criticism that one should direct towards the ECB is in fact that interest rates are still being artifically supressed and should therefore be raised further to the free market level. While it is not possibly to know for sure what the free market level -the level we would have had under a free market monetary system i.e. a gold standard- is as long as we have a fiat monetary system, we can be fairly certain that as long as money supply growth stays high, it is artificially supressed. And the current 7.6% money supply growth is way above the ECB:s own target of 4.5%, not to mention gold supply growth of 1-2%.

The result of the ECB's too inflatonary policies is as I pointed out in this article not only that consumer price inflation is above the ECB's supposed ceiling of 2%, but also the even more troublesome facts of excessive debt- and house price increases which in turn have pushed down savings which in turn have pushed the Euro-zone current account balance into deficit.


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