Friday, April 11, 2008

The ECB dozed off!

In Britain the target rate of inflation is set by the Chancellor of the Exchequer (Minister of Finance). Whenever the actual inflation rate surpasses the target by more than one percentage point the Governor of the Bank of England, on behalf of its Monetary Policy Committee (MPC), must send the Chancellor an open letter, explaining
1. the reasons why inflation has risen above the target,
2. policy action that the MPC proposes to deal with it,
3. the period within which the MPC expects inflation to return to the target, and
4. how the approach chosen by the MPC meets the UK Government’s monetary policy objectives.
These points appear in the introduction of the Governor’s letter of 17 April 2007 to the Chancellor.

The actual inflation in the Euro area exceeded its target – to keep inflation below 2 percent - by more than one percentage point last November. The introductory statement by Jean-Claude Trichet, President of the ECB, before yesterday’s press conference gave many reasons why the Euro area inflation has risen above the target and will stay above it for “a rather protracted period” which Mr. Trichet spelled out to 18 months in his answer to a journalist’s question.

But, all those reasons are outside reasons, as if they were beyond the control of the Governing Council of the ECB. They are not. There is no explicit mention that the inflation rate doubled in the Euro area since last August because of its lax monetary policy that shadowed the Fed’s decisions.

We not only read in the statement about “continuing very vigorous money and credit growth”, without implication in the doubling of the ECB’s favorite measure of inflation, but also “We (the Council) believe that the current monetary policy stance will contribute to achieving our objective” of maintaining price stability in the medium term.

Only a belief is offered to us, but nothing in explanation of policy conduct; as Pandora’s box, all evil spirits have escaped, only Hope remains!

The decision making bodies of the ECB will reach a middle-school girl’s age next June. It is time to publish the reasoning and argumentation behind the decisions of the Governing Council, the minutes of its meetings. Also, greater transparency necessitates a similar institutional arrangement as the Governor’s letter to the Chancellor in Britain.

Two years ago the ECB was “vigilant”, sometimes even “extremely vigilant”, no longer. Yesterday Mr. Trichet mentioned twice that the Council is “alert”.

Transparency does require mentioning when the Governing Council dozes off!

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