ECB Learning Curve Much Flatter Than The Unemployment Curve

Andrew Watt

Andrew Watt

The ECB has today cheered markets, driving shares up and bond yields and the euro down. Basically it has said that it will keep monetary policy expansionary until the economy improves for as long as inflation remains below target. In ECB-speak:

“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics.

There was also some encouraging (although still vague) talk of supporting lending to small companies, together with the European Investment Bank.

Great. Isn’t it easy to make sensible monetary policy in a context of low and falling inflation and high and rising unemployment? Only the mean of spirit would ask why the hell has it taken the central bank so long to do the obviously necessary?

Almost exactly one year ago I pointed out that the success of a dovish ECB announcement (“do what it takes”) in improving economic prospects only reminds us that it has actually failed in its duty, under its mandate,  to consistently support recovery. And that was a reprise of a post of a year prior to that which said, well, exactly the same thing.

I am sorry to bore you, but how can one write original posts when the central bank’s learning curve is so flat?

Only the really churlish would point out the course of unemployment and (core) inflation in the euro area over that two-year period.

UR and CI

Note: Eurostat data. UR = euro area unemployment rate (lhs), CI = HICP excluding energy, food alcohol and tobacco, annualised monthly change (rhs), target = implicit ECB medium-run inflation target (rhs)