Monday, March 17, 2003

Euro Zone Monetary Conditions Have in Fact Tightened

This unusual point is made by the economist. The rise in the trade weighted value of the euro is in fact equivalent to a 0.5% rate increase.

Since the ECB cut interest rates in December, the euro's trade-weighted value has risen by 6%, equivalent in terms of its impact on inflation to a rise in interest rates of more than half a point. Policy has, in effect, tightened this year, even though the economic outlook has deteriorated; and the euro area's core inflation rate (excluding food, energy and tobacco) has dropped below 2%. Fiscal policy has also tightened slightly because of the straitjacket imposed by the stability pact, which is forcing Germany to increase taxes in the midst of recession. Tighter fiscal policy increases the case for monetary easing.
Source: The Economist

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