European Central Bank keeps rates steady

Stephen Beard Feb 7, 2008
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European Central Bank keeps rates steady

Stephen Beard Feb 7, 2008
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KAI RYSSDAL: It’s a global economy we live in. That much isn’t really open to debate. Still, intelligent people can disagree about what’s happening in that economy. We know what Ben Bernanke thinks. He and the Federal Open Market Committee have made it clear they’re worried about a slowdown, the traditional remedy for which is interest rate cuts. Today Jean Claude Trichet, Mr. Bernanke’s opposite number at the European Central Bank, pointedly missed a chance to follow suit. The ECB held its short-term rate steady at 4 percent, the same place it’s been since last summer. The decision to stand pat could affect the U.S. economy.

Marketplace’s Stephen Beard reports from the European Desk in London.


STEPHEN BEARD: Here’s a curious thing. Inflation is higher in the U.S. than in Europe, and yet the FED has been slashing interest rates, while the ECB has kept them on hold. Today’s non-move by the ECB points up a vivid contrast. The Fed is terrified of recession. Martin Woolf is Chief Economics Commentator of the Financial Times. He says The ECB is not that worried about the slowdown already underway in Europe.

MARTIN WOOLF: This is not expected to be anything like as severe a downturn in the eurozone as a whole, as it is now almost universally believed it will be in the United States.

Today’s inaction by the ECB could help the U.S. economy, reducing the trade deficit. If the ECB holds rates steady while the FED cuts, the dollar could fall further, making U.S. exports cheaper.

WOOLF: And on the whole it is more likely than not that the dollar will continue to fall as interest rates in the U.S. continue to decline, and that will tend to help U.S. exports a bit.

Of course all this depends on whether the ECB has got it right. The bank has a tough job, setting one interest rate for 15 countries. It assumes that overall the European economy will remain reasonably buoyant. Graham Mather is with the European Policy Forum.

GRAHAM MATHER: Everyone’s still watching very closely in case there’s more write-offs, more bad news from the banking sector in the U.S. having knock on effects in Europe. People are not at all persuaded that we’re out of the woods there.

And we might have been here before. After the dot-com bust, many European economists said that Europe would be immune, but Europe suffered four years of stagnation. The U.S. recovered more quickly.

In London, this is Stephen Beard for Marketplace.

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