European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.
“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.” Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said.
I am not exactly sure that the ECB’s rate hikes last year are something to be proud of, nor would I describe the action as careful. Those rate hikes arguably accelerated and deepened the European debt crisis, which necessitated a policy reversal in the fall and the massive ballooning of the ECB balance sheet. One would think that the “careful” policy would have been to have not raised interest rates, thus lessening the degree of financial stress and perhaps avoiding subsequent large scale intervention. Moreover, one has to question the success of any policy that helped trigger this unfortunate unemployment path:
This post originally appeared at Tim Duy’s Fed Watch and is posted with permission.