This is normal when decisions are made by a committee-and is also a sign of good health, of an institution that is open to different views rather than being dangerously driven by a single way of thinking. Maybe the Governing Council was divided on both counts, the amount of the overall tightening and its speed. If markets had correctly anticipated that the Governing Council was aiming at a policy tightening of 200 basis points within two years, such expectations would themselves have made monetary conditions less expansionary, and the same path of interest rates would have resulted in a lower euro area inflation. In late 2005, when the ECB started raising rates, markets were left in the fog as to the rate the Governing Council was aiming for and the speed with which it was planning to get there. But this remains an impossible exercise, because the way the Governing Council interprets the data and makes its interest rate decisions remain clouded.Ī recent example suggests how large the benefits of greater transparency might be. Now more than ever, it is important for the markets – and the public – to understand the reasoning behind the ECB’s policy decisions. With euro area inflation rising, ECB credibility drifting down, the euro area economy slowing down and global financial markets unable to sort themselves out from the current turmoil, there is great uncertainty about the ECB’s next policy move.
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