Wednesday 20 November 2019

Rate cuts mask sinister reality

The signal from the ECB that this year's series of interest rate increases is now at an end is good news for embattled Irish homeowners.

Having last raised rates as recently as two months ago it now looks as if the next move in ECB interest rates will be a reduction, possibly before the end of the year.

Unfortunately the bad news is that the ECB's interest rate U-turn has been prompted by renewed fears that the eurozone and world economy is facing into a renewed recession. If this does turn out to be the case then the demand for Irish exports, which has been one of the few bright spots in the Irish economy this year, will be hit.

It is now clear that the two interest rate increases from the ECB this year, in April and July, were badly mistimed. The ECB's inflation phobia led it to confuse a temporary run-up in global commodity prices with underlying inflationary pressures. This is the second time in three years that the ECB has made this mistake and begs serious questions about the organisation's methods and operation.

Having been modelled on the German central bank, the Bundesbank, the ECB's sole mandate is to maintain price stability. Unlike the US Federal Reserve it has no duty to consider the impact on growth and employment when setting interest rates. Now, as in 2008, the citizens of the eurozone are paying the price for the ECB's overly restrictive mandate.

Not alone is the ECB's mandate excessively narrow, the manner in which it conducts its business is far too secretive. Unlike the Federal Reserve and the Bank of England, both of which publish their minutes within a few weeks, the ECB adamantly refuses to let daylight intrude upon its operations. When this lack of transparency is combined with the extraordinary degree of independence which has been conferred upon the ECB, one is left with an institution that is dangerously lacking in accountability.

The ECB's independence has been justified on the grounds that it was necessary to protect it from political interference. However, its repeated blunders as it pursues an obsessive anti-inflation crusade to the exclusion of all other considerations raise disturbing questions about how it uses that independence. While the ECB's lack of accountability and transparency might be a price worth paying if there was widespread confidence that it was doing its job well, questions will inevitably be asked if it is seen not to be doing so.

Yesterday's press conference announcing the ECB's interest rate decision was the last to be taken by Jean-Claude Trichet, who retires shortly. When the ECB faces the world's media next month its new president Mario Draghi will be in the hot-seat.

With confidence in the ECB having taken a battering following this year's interest rate blunders, Signor Draghi's first job will be to restore public confidence in the institution. Ending the ECB's culture of secrecy and letting Europe's people see how it reaches its decisions would be a good start.

Irish Independent

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