Editor’s Note
What’s going on at the European Central Bank? With inflation raging around the world, and the US Federal Reserve and the Bank of England raising interest rates to douse the fire, the ECB is sitting on its hands. In mid-March, the eurozone’s monetary authority left the base rate unchanged at 0.0% as England’s central bank raised the sterling base rate from 0.5% to 0.75%. In America the Fed hiked interest rates by a quarter of a point to 0.5%, and signalled that its lending rate to banks will be 2.0% or more at year end. In London, BofE governor Andrew Bailey explained: “We have a target of keeping the rate of inflation at 2%. It’s much higher than that at the moment. We expect inflation to fall back and be around our 2% target in two or three years’ time. The main tool we have to influence inflation is interest rates. Raising the interest rate will help bring the rate of inflation down. It will take time to work.” The European Central Bank also has a 2% inflation target, but it thinks the Brits and the Americans have got it wrong. Never mind that annual inflation across Europe in February averaged 6.2%, with cost of living pressures even higher in Lithuania (14.0%), Denmark (10.0%), Belgium (9.5%), Poland (8.1%) and Spain (7.6%). The rarefied view from the ECB skyscraper in Frankfurt is that there is an improving medium-term inflation outlook. ECB president Christine Lagarde recently commented that “inflation expectations have converged to our target of 2% across a range of measures”. The bank’s economists expect eurozone inflation through 2002 to average 5.1% to 7.0%. Nevertheless, eurozone rates aren’t budging because, says Lagarde. inflation is increasingly likely to stabilise at the 2% target over the medium term. At this moment of crisis, doubts may creep in about Lagarde’s judgement. She’s a lawyer by training and had no economics or central bank experience when she took over from Mario Draghi in July 2019. Like her predecessor, Lagarde maintained the ECB’s policy of driving down sovereign interest rates through asset purchases, which are on track to total €5,000 billion by the autumn. The veteran French bureaucrat also speaks of being guided by optionality, gradualism and flexibility, and in a recent speech Lagarde referenced American poet Maya Angelou as summing up her outlook — ‘hoping for the best,prepared for the worst, and unsurprised by anything in between’. It’s a pity that George Bernard Shaw isn’t also on her radar. ‘A life spent making mistakes is not only more honourable but more useful than a life spent doing nothing,’ Shaw wisely opined in the aptly named play, Heartbreak House.