Inflation eased by strong euro

LAST week, we saw the European Central Bank yet again leave interest rates unchanged, with the core ECB rate remaining at 3.25%.

In recent weeks in this column, the conundrum facing central bankers in the US and Britain has regularly been the theme. That the ECB faces similar complexity in dealing with interest rate policy for its economic area is no less the case than in Britain or America. The message from the ECB president accompanying the decision to leave rates unchanged was a mixed one. The balance of risks determined that interest rates remain unchanged, with the recent strengthening of the euro being a central force in the decision. Other matters such as inflation, and associated pressures, together with consumer and business sentiment had much to do with the prevarication evident in the ECB’s medium term view about interest rates. ECB president Wim Duisenberg said that they aren’t putting up interest rates this time, but don’t rule it out in the future.

On balance, it is a reasonable message, as the ECB is dealing with a mixture of sometimes-conflicting forces in setting interest rate policy, just as its peers are in London, New York and elsewhere.