Thursday, November 6, 2008

ECB Lowers Its Rate

The European Central Bank just lowered its basic rate to 3.25 percent. This has to be the most-telegraphed move in central banking history. Trichet all but wrote it out in flaming letters more than a week ago. But now it's done. Yet another step in the evolution of the crisis and the end of an era of economic thinking. La pensée unique (a phrase I never liked) is growing more diverse daily.


Unknown said...

Trichet, of course, is speaking in press conference as I write (I am not tuned to his press conference). I do not think that this represents the end of an era in economic thinking. Trichet will be absolutely justified in telling us that macro prospects have fundamentally changed over the past few weeks and that, in particular, inflation prospects have considerably dimmed (oil and assorted commodities retreating, recession etc...). I really don't see at all how rate cuts at the present time would show anything but a change in prospects.

As for la pensée unique, that is an expression employed by self-called thinkers and politicians, not really by professional economists.

Much more interesting in my view would be a discussion by Trichet of the broken transmission mechanism of monetary policy, as this is what is happening mainly in the US, but also in Europe and elsewhere, and this is what has led the BoE into a giant 150bp rate cut which will maybe generate a 50bp rate reduction on mortgage rates. That would have been a real change in economic thinking, because it might have signaled a shift towards quantitative easing (we will get there eventually in my view, hopefully not too late).

Unknown said...

Bernard, Yes, of course, you're right ... I was a little overheated in my initial reaction.