Throwing out the Inflation Targetting Mandate along with the Anti-Bailout Clause
Unlike the Fed, the ECB mandate is restricted to price stability. This means dogged inflation targeting in a post-2008 keynesian world where such behavior has been less than praise-worthy. Though post-2008 crisis, the US accepted CPI inflation rates ranging from -2% to +6%, the ECB, using its chosen inflation statistic- the Harmonized Index of Consumer Prices (HICP), started raising rates step by step immeadiately after the HICP rose past 2% in late 2006. (The HICP high of 4% in mid 2007 was certainly a lagged effect, occurring despite extreme persistence by ECB officials.)
All this seems to be a moot point now. The ECB is going to have to disregard its inflation-dogging mandate and come a major step closer to disregarding a Maastricht treaty rule on bailing out troubled members. Today, ECB President Trichet announced a major move to go forward in buying Italian and Spanish debt in the biggest and most aggressive rotten-debt-eating play to date. And unlike the Greek situation, Italian and Spanish debt would be so large that it would make sterilizing the bond purchases impossible (Italian and Spanish sovereign debt traded on the markets today is about 1.7 trillions Euros- the ECB and later the European Financial Stability Fund – EFSF – will have to eat up at least half), leading to inflation that will almost certainly surge past 2%. One wonders if the ECB now regrets wasting time inflation-targeting in late ’10 and early ’11- akin to driving a monster truck over one’s carefully tended garden.
Perhaps the most troubling though, is the feeling that it may all be for naught. A graph from BloombergBrief today (re-printed below) shows the effect of huge ECB purchase of periphery debt (or lack thereof) on 10Y yields of Greek and other periphery debt.
it was going to happen so or later
Posted by: Intrinsic Value | Sunday, August 28, 2011 at 07:33 PM