EUROPEAN CENTRAL Bank president Jean-Claude Trichet defended his institution against criticism that he has been too cautious in combating the deepest economic slump since the 1930s.
The policies of the world’s major central banks, led by Mr Trichet, Federal Reserve chairman Ben Bernanke and Bank of Japan governor Masaaki Shirakawa, were scrutinised by economists at an annual symposium in Jackson Hole, Wyoming, this weekend.
Economists including Nouriel Roubini, the New York University professor who predicted the financial crisis, have criticised the ECB for waiting too long to cut interest rates and for supplying less stimulus than the Fed.
Mr Trichet used a 20-page paper to argue the central bank was guided by its primary aim of delivering stable prices and by a need to revive bank lending.
“Criticising a central bank that is acting with a steady hand for being ‘behind the curve’ rather misses the point. A gradualist approach of this kind may be the most effective antidote to the threat to price stability.”
Mr Trichet defended the ECB’s delay in cutting interest rates until last October, saying it sought to ensure price stability.
While the ECB has taken unprecedented action, its benchmark rate is still the highest in the Group of Seven, at 1 per cent, and it has capped its plan to buy covered bonds at €60 billion ($86 billion). The bank has focused on offering banks unlimited cash for as much as a year.
Mr Trichet said the ECB’s approach has succeeded in leaving “no discernible doubt” among investors that it will control inflation while also easing the liquidity constraints at banks.
ECB executive board member Juergen Stark told the gathering there was “no need” for the bank to alter its target of keeping inflation just below 2 per cent.
“To discuss a change or shift in the strategy in my view could undermine the credibility of the central bank.”
Mr Trichet said he doubted targeting asset prices could be “implemented in a mechanical way”.
The Fed in turn was faulted for its policy of keeping interest rates close to zero for an “extended period”, which Carl Walsh, professor at the University of California at Santa Cruz, said was “potentially inconsistent” with its price-stability goal.
That prompted Fed vice-chairman Donald Kohn to respond that the policy was aimed at ensuring inflation did not get too low. “The commitment to low rates is designed to keep inflation from falling and falling persistently below what we might want it to be for a long time,” Mr Kohn said at the symposium yesterday.
“It’s not designed to raise inflation expectations. There’s no inconsistency there.”
Mr Walsh had his own recommendation for the Fed. The central bank must eventually lift the benchmark rate “aggressively” from the current level of almost zero to prevent an outbreak of inflation. “Committing to a gradual increase in the policy rate is not justified.” – (Bloomberg)
