Mario Monti Makes A Reasonable Point

Mario Monti – former European commissioner for the EU internal market – is interviewed in the FT today. On the recent ECB decision to raise interest rates he has this to say:

Critics of the ECB say its monetary policy has been too restrictive. Mr Monti disagrees but says “there is an institutional credibility to be gained in the infancy of an institution. For a central bank, that is gained if you err on the restrictive, rather than the permissive side.”

Yesterday’s rate increase “is likely to avoid a weakening of that perception of credibility, and is likely to reduce the need for further increases in the very short term”, he said.

I don’t entirely agree with him, but this is a reasonable explanation. I agree that you couldn’t exactly call recent ECB policy too restrictive. You really can only sustain that position if you think that what Germany really needs is a sustained dose of Japanese-style ZIRP (but to do this you would have to undo monetary union in my opinion, EMU wasn’t constructed with this type of problem in mind). We may get to this situation, but we aren’t their yet. Hence there is a plan b available, which is try to continue offering a bit of something for everyone.

In this context M. Monti is concerned about bank credibility, but he also makes a more subtle point: that a quick rise now buys time, and takes off the pressure for subsequent rises in the short term. As I say, I don’t entirely buy this, but at least it is a coherent argument.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".