European Central Bnakers Should Cherish their Disagreements

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Publication Date December 2022
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The European Central Bank (ECB) must chart its monetary policy through very murky waters. Whereas the inflation problem in the United States is largely driven by an overheated economy, the picture in the eurozone is much more challenging. The pandemic reopening has led to rapidly rotating demand for goods and services, and disruptions have limited supply chains while the Russian war on Ukraine has created an acute energy crisis, causing inflation to surge in the eurozone. But the growth of demand and wages is weaker than in the US, and Europe is facing a recession as consumers tighten their belts in response to high energy bills.

These factors could stamp out inflation more quickly than expected. Given these cross-currents, there is a real danger of a monetary policy mistake, in which the ECB either raises interest rates too high, too fast, causing a deeper recession than needed, or acts too timidly, and lets inflation gallop away. Instead of secretive and consensual decision-making, more robust and open debates would help to prevent groupthink and clarify the tricky trade-offs the ECB faces. The ECB should follow the Federal Reserve’s example and publish a ‘dot plot’ with its decision-makers’ views.

Source Link https://www.cer.eu/insights/europes-central-bankers-disagree
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  • https://www.cer.eu/sites/default/files/insight_ST_SV_ECB_20.12.22.pdf
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