North America Takes Control of ECB

What a nice Fourth of July present for us Americans!  With today’s moves it looks like ideas from the New World are sweeping across the Old World.  And investors are taking notice:

The Bank of England told financial markets on Thursday they were wrong in expecting interest rate hikes relatively soon, in Mark Carney’s first significant policy signal as the new governor.

Introducing an element of “forward guidance” into the Monetary Policy Committee’s statement on the economy in saying the market’s recent expectations of rate rises in 2015 “were unwarranted”, the BoE has broken with its tradition of not commentating on market movements.

Sterling fell sharply against other currencies and equity prices jumped after the bank’s move, which investors took as a sign the central bank was likely to remain dovish under its new governor. But forward interest rate markets did not move fully back to the expectation in May that the first rate rise would wait until well into 2016.

British stocks rose 3%.  The economic news out of the UK was also strong, but of course that doesn’t explain why the pound fell from 1.52 to 1.50.

A few hours later the ultra-conservative ECB took baby steps into the Bernanke/Carney world of forward guidance:

FRANKFURT (Reuters) – The European Central Bank will keep interest rates at record lows for an extended period and could yet cut them further, the bank’s chief, Mario Draghi, said on Thursday.

Less than two hours hour after the Bank of England gave a steer about future interest rate moves at Mark Carney’s debut policy meeting as governor, the ECB president adopted the same tactic.

“The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time,” Draghi told a news conference after the ECB left interest rates at 0.5 percent, emphasizing that this was the first time that the ECB had done so.

And Draghi hinted that more steps may be taken if the eurozone economy doesn’t do better:

The ECB left its main refinancing rate at 0.5 percent and the deposit rate at zero, as was expected by economists in a Reuters poll.

“50 basis points is not the lower bound,” Draghi said.

On a day when Americans celebrate their independence from Britain, the Old World becomes ever more dependent on ideas from North America.

PS.  The euro also fell.  US stock futures jumped on the good policy news—so much for “beggar-thy-neighbor” theories.  It’s a positive sum game.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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