Opinion
By Yiannos Stavrinides
June's decision was never followed through. At the meeting one month later, the European Central Bank chose not to extend its restrictive monetary policy with another interest rate increase. The message in June had been clear. It was an immediate response to rising energy prices after fighting resumed in the Middle East.
Singapore took a very different approach. The Monetary Authority of Singapore approved a second straight interest rate increase, taking pre-emptive action against the possibility of another jump in oil prices even though inflation is currently easing. The reasoning, and one I agree with, was Singapore's complete dependence on imported energy and the exceptional vulnerability that creates for its economy.
At last Thursday's meeting, the ECB remained firmly guided by incoming data and saw no reason to act before conditions changed. In effect, it stopped halfway through the process. So what explains the ECB's decision? Its main argument was the path of energy prices. Although prices remain highly volatile, they are still tracking within the June projections. Put simply, energy prices remain below the levels the ECB expected when it decided to raise interest rates.
The decision not to act on Thursday also reflected inflation, wage growth, economic activity and, of course, inflation expectations. The ECB continues to worry about weak economic growth. With this year's growth forecast standing at just 0.8 percent, there was very little room to continue the course that began in June.
During the press conference, Christine Lagarde chose her words carefully, describing the decision as a pause rather than a change in direction. She said the pause was a tactical decision and should not be interpreted as a shift in policy. She also made clear that September will offer another opportunity to reassess the situation, adding that oil prices above $95 a barrel would warrant close attention. Since then, the ceasefire has pushed Brent crude back below $95 a barrel after it briefly climbed above $100 when the return of the Houthis came into view.
Singapore expects economic growth of 5.5 percent this year. The ECB, by comparison, is trying to make policy in an economy that is barely growing at all. The eurozone simply does not have the economic cushion needed to support tighter monetary policy. At the same time, a poorly judged decision could increase unemployment, force more businesses into bankruptcy and destabilize the banking system.
When talking about inflation, the real value lies in understanding what is causing it. Right now, there is no evidence that demand is overheating. The problem comes from weaker supply. Under those conditions, aggressive interest rate increases could damage economic growth while doing little to bring prices down. Then consider the challenge of setting one interest rate that works for 20 different economies, each with its own unique structure, and it becomes easy to understand why few people would want to be in Christine Lagarde's position today.
