21 November 2003

EZA Report 569 ECB-Monetary

ECB concerned over euro area boost to global liquidity
Our recent conversations in the European Central Bank have done nothing to dispel our growing impression in recent years that its strategy, and thus its analysis and stance, is flawed. Economics staff speak, usually with dismissive irony, of the need to align their analysis with the doctrine that has infused the monetary stance since inception in 1998. There is little sense of a free and open discussion of economic cyclical and structural fundamentals. While the ECB currently views inflationary risks as very low - and there is therefore no indication of any change of policy for the foreseeable future - there is concern that the euro area is contributing to excessive global liquidity that may be building up price pressures elsewhere. Euro money growth is being watched with some concern as always; the very strong development of securitisation on the asset side of bank balance sheets - expansion rates of up to 30%y/y in recent months - is also becoming an increasing focus. Yet new President Jean-Claude Trichet may open the discussion internally. As well, a Briton has been appointed to head the monetary stance division in an economics environment dominated by German and Dutch nationals.

SummaryAsset Conclusions: Rising euro diminishes ECB inflation concerns for now but focus on contribution to global liquidity keeps policymakers uneasy

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© Graham Bishop