Monday, January 24, 2011

325 Basis Point Cut Is No Loosening?

Paul Krugman accuses the ECB of being hypocritical for now warning about inflation after the all-items index rose above 2%, while the "core" index has increased only about 1%. He claims that the ECB didn't talk about the need for loosening when inflation fell dramatically (and in fact contrary to his chart,it fell below zero, but never mind that since that would seemingly strengthen Krugman's case) in 2008-09.

Well, I don't know how much they talked, but they did act, lowering its refinancing rate  from 4.25% in early October 2008 to 1% seven months later, in early May 2009. That is a far more dramatic change than any rate increases in ECB history. It for example 2½ years (30 months) for them to raise interest rates from 2% to 4.25%.

So if there is any hypocrisy, it is with a pro-inflation tilt. While some other central banks were even faster in reducing interest rates, that doesn't change the fact that the ECB has been more eager to reduce interest rates than to raise them.