Thursday, December 04, 2008

European Central Bankers Follow Bernanke's Path

Today the ECB cut its target rate 75 basis points to 2.5%. This is the biggest cut ever during the ECB's 10 years of existence. Yet as it happens, the ECB was actually a force of moderation, with the Bank of England delivering an even more radical cut, 100 basis points to 2%, and the Swedish Riksbank cutting as much as 175 basis points to 2%.

The moves from the ECB and the Bank of England was expected, but the Riksbank's cut was much more radical than I and virtually all other analysts had expected (most of us had expected 100 or 125). The Riksbank's monetary policy has done a 180 degree turn as they actually raised rates to 4.75% as late as September this year. It appears that the Riksbank board is in a full panic mode about the Swedish recession. As a result, the Swedish krona fell to a new all time low against the euro, so that a euro now costs SEK 10.61. The pound also fell to a all time low against the euro, at roughly €1.15/£ (Or £0.87/€ in inverted terms)

Despite the aggressive character of these cuts, they will likely not make much difference in the short-term, just like Bernanke's aggressive cuts didn't make much difference. The downturn will continue and price inflation will likely undershoot the targets in the short-term (particularly in the euro area). Once oil stabilizes, we will however see an upside risk to inflation, particularly in the U.K. and Sweden. And central banks will likely not dare to be as aggressive in raising rates as they have now been in cutting them.


Anonymous Anonymous said...

PPP=Purchasing Power Parity

Is not the PPP for EUR/SEK = 9,40 kr.?

That is actually 11% below the current price!

May I ask your view on this?

Göran, Sweden

8:31 AM  
Blogger Fleck69 said...

Hey man that was a great article, very well written. Although I think FDR should be on the list. BTW I went back and read your older posts, great stuff! Look forward to reading more of your stuff in the future.

6:51 PM  
Blogger Fleck69 said...

Massive inflation is coming. After we come out of this recession inflation is going to be out of control. Particularly here in the United States. Where the government is going to put pressure on our central bank to continue fund the governments activities, Despite the risk of inflation.

6:52 PM  

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