11 May 2003

EZA 527 - ECB Monetary

ECB ECB strategy change implies more accommodative stance, downgrading of money, despite rhetoric
The changes to the monetary strategy announced by the European Central Bank on Thursday imply a more accommodative stance in the future. This is precisely the conclusion officials do not want financial market agents to reach, and was explicitly denied. However it is the clear logical consequence from the opaque explanation delivered by ECB board member Otmar Issing. Despite the rhetoric, the inflation target has been changed in a substantive way. The 'two-pillar strategy' has been reversed to give money measurement a subordinate priority. The annual review of the M3 reference value will be abolished - in reality an admission the theory has become untenable. There is no indication that the ECB has adequately altered the strategy to take into account the risks associated with the current rise in the external currency value. As well, the changes imply that the strategy in the past was erroneous: it did not adequately take into account the effect of inflationary differentials from the exogenous shock of imposing a single currency regime on a region in different stages of economic and asset price development, or other factors such as productivity or measurement bias.

SummaryAsset conclusions: Review of strategy has potential to at last bring a significantly improved ECB monetary and economic analysis; positive for euro

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© Graham Bishop