The Gold Standard | Central Banking Oscars

Two rate hikes in April and July and a cut in November. That is how the European Central Bank has acted on interest rates in the Eurozone this year. Human beings have the ability to let good things turn bad but they find it almost impossible, overwhelmed when asked to undo the consequences of what they have unleashed. So, one should not be critical of European Central Bank. Things are beyond their (or, for that matter, anyone’s) control.

We have done our deeds and now it is time for consequences. There is no way to turn the clock back now. One just has to witness the frentic flailing of arms on stock trading pits now to see the futility, the pointlessness and the meaninglessness of trying to make sense of the situation. Down 5% one day, up 4% another. Intra-day volatility is even more breathtaking. I am digressing.

What caught my eye in the opening statement of the European Central Bank is this:

The Governing Council continues to view the risks to the medium-term outlook for price developments as broadly balanced, taking also into account today’s decision. On the upside, the main risks relate to the possibility of increases in indirect taxes and administered prices, owing to the need for fiscal consolidation in the coming years. In the current environment, however, inflationary pressure should abate. The main downside risks relate to the impact of weaker than expected growth in the euro area and globally. In fact, if sustained, sluggish economic growth has the potential to reduce medium-term inflationary pressure in the euro area. [Full statement here]

Yes, Victoria: there is no inflation risk. No matter what my central banking friends across the Atlantic and this side of the Atlantic do, we will not create inflation either here or anywhere else. You have to trust us. Haven’t we been deserving of that based on our conduct in the last thirty years?

Clearly, one of the criteria for becoming heads of Central banks is the ability to lie with a straight face and repeatedly and see that they become truths.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.