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After the European Central Bank’s July meeting Thursday, Mario Draghi announced the central bank would maintain its historically low interest rates — a 0.15% main lending rate and -0.1% on funds deposited at the ECB — to try to get inflation up to 2% from the current 0.5%. Draghi reiterated the ECB’s stance on quantitative easing: it’s in the toolbox, but it’s not coming out yet. Despite a report released last week by the Bank for International Settlements that urged austerity and higher interest rates, central bankers from Draghi to Janet Yellen to the Bank of England’s Jon Cunliffe seem united in their desire to keep rates low and push consumer prices higher.
David Wessel thinks the central bankers’ logic goes something like this: “There may come a day when our worries about financial stability will prompt us to hike interest rates, but rates are ‘the last line of defense.’ Not now.” That said, Wessel is skeptical about Yellen’s preferred methods to ensure stability — macroprudential tools (regulations, mostly) that attempt to guard against system-wide risk before crises can happen. They haven’t been tried enough for us to predict their success, he says, but he welcomes the bankers’ reluctance to raise rates quickly. The Economist points out that while some markets, such as housing in London, are starting to look frothy and overvalued again, “the excesses are still small, compared with those that brought down the global economy in 2007.” Since the eurozone economy is barely growing, raising interest rates “could push the economy back into recession and turn inflation to deflation.”
Leonid Bershidsky, though, says macroprudential policies are largely ineffective, and have led to a large shadow banking system in which investors try to avoid regulations. He thinks instead that the world’s central banks should start raising rates again, in line with the suggestions in the BIS report, because low interest rates could lead to foolish risk-taking and even a new asset bubble. Taking on Paul Krugman, who dismisses the idea that interest rates are artificially low, Bershidsky cites the Swedish central bank as a recent example of smart economic policy-making: The Riksbank hiked its interest rate, but he says there was no evidence that this led to substantial deflation or unemployment (to be fair, the Riksbank cut interest rates back to crisis-era levels last week).
The BIS and its head, Jaime Caruana, have been pushing for higher interest rates for years, and they’ve always been wrong, says Krugman. His assessment mirrors that of Martin Wolf, who mocks what he sees as the BIS’ Old Testament-style warnings about a coming inflation apocalypse. Tim Duy, reviewing the data, agrees with Joe Weisenthal that inflation is in finally coming, but not in a bad way: “It is simply difficult for me to become too worried about inflation given the history of the past twenty years — twenty years in which the US economy was at times substantially outperforming the current environment, no less. Underlying inflation simply has not been a problem.” — Jordan Fraade
On to today’s links: