"...when to start tightening monetary policy... :I don't know why but when I read the paragraph above, I read it as a clear signal that the ECB is preparing to tighten the monetary conditions...not because we have a robust and sounds growth in Europe - far from that - but simply because of external factors that may force the ECB to raise interest rates earlier than anticipated in order to anchor inflation expectation.
1. Don't wait too long, especially if the signs of recovery are apparent and interest rates are at very low levels. The sooner tightening starts, the less tightening might be needed later on.
2. To be sure, don’t wait to see inflation rising before raising rates. It will be too late.
3. Use a wide set of indicators and arguments to explain to market participants and the public at large why tightening is needed. Money and credit aggregates, asset prices and the level of interest rates might be useful indicators of why the time has come to reduce accommodation.
I leave it to you to judge how valid these recommendations are for the current conjuncture.", Bini Smaghi
What are the external factors?
- an imminent reevaluation of the chinese currency,
- a rise of the oil price (more than 70% in a year),
- and overheating of the new world engine: the emerging markets.
Would the ECB allow to let inflation go out of control - as some suggest - in order to reduce the burden of debt on European states? let's get the answer for the future ECB president (2011) - jurgen Stark:
"let me stress that any call to reduce the real value of public debt through higher inflation will be firmly opposed by the ECB. A low and stable level of inflation is a prerequisite for confidence, stability and sustainable growth."