when you said you expected a rate cut, i thought you were wrong...i felt they would however stand pat...now i'm not so sure..read this and tell my you don't see a deer caught in the headlights..
fxstreet.com
ECB's Issing says central banks should not try to 'prick' asset price bubbles
Tuesday, May 11, 2004 7:07:28 AM
afxpress.com
FRANKFURT (AFX) - Central banks should not try to prick asset price bubbles in property or stock markets, but they do need to take account of asset price developments when setting interest rates, European Central Bank chief economist Otmar Issing said
"Some might argue that, for example, real estate prices are at times so high that there is very little doubt that they are overvalued, even though one does not know exactly by how much," Issing said at a dinner speech last night
"Even in such an extreme situation a central bank trying to 'prick the bubble' through an increase of interest rates faces substantial risks," he said. "The rate hike required to 'discipline' the real estate market may be so high that it would inflict severe costs on the real economy, thereby impairing the reputation of the central bank." He said central banks should therefore not target asset prices in themselves
He said the ECB includes consideration of the direct wealth effects originating from asset prices in its economic analysis, while its analysis of monetary developments can yield information on the risk of asset price distortions
Issing said unhampered extreme and vehement asset price fluctuations can imply significant costs for the economy
"When the downward corrections lead to a deflationary spiral, monetary policy may be constrained through the so-called 'zero bound' on interest rates. All major deflations in history were related to a large, vehement and sustained fall in asset values," he said
Central banks therefore do not have to be inactive bystanders, but should give guidance on its views on asset prices where necessary, he said
"We should certainly avoid under all circumstances that in our regular communications with the market any contribution is made to collective euphoria or collective pessimism. Well-phrased communication can have a moderating effect on market behaviour," he said
"In special circumstances even specific expressions of concern could be called for," he said
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