ECB vs FED

Thèmes abordés

FED, ECB, Economics Jean claude Trichet Monetary policy interest rate inflation,

Résumé du document

This article is dealing with the monetary policy to adopt by the European Central Bank, especially the one concerning the interest rate which is a very important one, for the upcoming months.
The ECB's president, Mr Trichet, is explaining why the organism wants to keep a lower interest rate near 1% in Europe. He is arguing that is not necessary, currently, with the European situation, to increase the interest rate in order to launch again the economic growth and to achieve the main goal of the ECB, which is to maintain the prices stability in Euroland. But with the current situation, the ECB adapts a politic in order to face the situation and the current aim is not to maintain the prices stability because the practise creates some inflation. Moreover, if the ECB keeps a lower rate at 1 percent, that means that the population is able to contract a credit at this cheap rate, and therefore they can hold money to do what they have projected. This low interest is efficient also to face the debt in Europe because the State can refund the deficit a lower rate.

Extraits

[...] In this part we will see the pros and cons of this policy led by Mr. Trichet. Firstly, the ECB has chosen to set up and keep its low interest rate in order to restart the economic growth. Indeed, if the interest rates are low, the consumption will increase because the households and the companies will be attracted by the cheap offer of loan. With the money they will borrow, these actors will invest and consume and this will restart the economy. [...]

[...] Nevertheless, it can have a good impact on the labor force to have a low interest rate, in order to face the unemployment. Moreover, the practice of a lower interest rate is implemented in order of trying to respect the four main elements presents in the Magic Square which are the next : the inflation rate, the unemployment, the GDP growth and the current account. Indeed, it is impossible to have a perfect image but the ECB's aim is to try to find a right repartition between these elements. [...]

[...] The ECB earlier left its benchmark interest rate at a record low of 1pc. “Inflation expectations remain firmly anchored,” he said. Trichet is under pressure to do more to shore up investor confidence in the 16-nation euro region as government spending cuts and concerns about the health of the banking sector cloud the outlook for growth. The International Monetary Fund said yesterday the ECB may have to step up its purchases of government bonds, which have already split the bank's 22-member Governing Council. [...]

[...] It was fixed at 0.414 pc yesterday. The rate that banks charge each other to borrow for three months has increased to 0.8 pc, the highest in 10 months, from 0.63 pc at the end of March. Citigroup forecasts that the overnight rate will rise to 0.8 pc by October. Europe's economy is showing signs of weakening after Greece's fiscal crisis undermined investor confidence in the euro, forcing governments to cut spending and examine how resilient their banks are to further shocks. [...]

[...] But in order to boost the economy the FED has implemented an interest rate between 0 and to stimulate the economy but has to take care of a possible inflation. The negative effect of a low interest rate is that households who are borrowing money may not be able to reimburse in the future. They could accumulate debts and report saving for later when it's crucial to save in order to reimburse. It could lead to a new subprime crisis like in 2008 when the U.S. [...]