Macroscope | ECB faces a daunting uphill battle to raise interest rates
You really wouldn’t want to be in the European Central Bank’s shoes right now. It is stepping through a minefield, tiptoeing between perilous politics, conflicting economic signals and deep divisions about where euro zone monetary policy should be heading.
There is little consensus other than for the ECB to play safe and stick policy in neutral gear over the next six months, while Europe tussles with critical national elections in Germany, France and Holland, which could carry grave risks for the future of the euro and a united Europe.
But the ECB keeping its head down and ‘playing politics’ may be a step too far for Europe’s monetary hawks. Policy hardliners in Germany’s Bundesbank are already fretting that Europe has had too much policy zest in the last few years and the excess stimulus now needs mopping up.
In their view, the ECB has ended up ‘behind the curve’ and signs of overheating in Europe’s bond and equity markets poses even bigger risks to the real economy. With the ECB committed to extending its €2.3 trillion asset purchase programme until December and key interest rates stuck in negative territory, it smacks of policy overload and a potentially nasty inflation backlash ahead.
For a generation in Europe used to zero and negative interest rates, higher borrowing costs will come as a shock
ECB policy doves still read too many dark signs in the euro zone economy as a reason for maintaining the policy slack for years to come. Germany might be bouncing back to better health, but the 7.4 per cent collapse in German factory orders last month highlights a danger that things might not be going quite so well in Europe and the rest of the world.
