The European Central Bank may not have slashed interest rates as deeply as the US Federal Reserve during the last economic downturn, but its policy did more to revive growth, the ECB chief said today.
Defending the ECB against attacks that it is less proactive than the Fed and too often ignored growth, ECB President Jean-Claude Trichet disputed the notion that his central bank suffered from excessive caution.
In fact, the ECB kept its monetary policy looser and rates low for longer than in the United States, flooding the euro zone with lots of cheap money to revive its economy, Mr Trichet told a European Parliament committee.
Moreover, it could only pursue this policy because the ECB had succeeded in keeping inflation expectations tame, Mr Trichet said in remarks that served as a rebuttal to those who criticise the ECB's inflation-fighting mandate. This allowed the ECB to keep interest rates at a record low of 2 per cent for over 2 years, he said.
The Fed may have cut rates to 1 per cent but it held them there for only one year. "Exercises suggest that since 2001, and compared with the flexible economy par excellence the US, our policy interventions had a greater stabilising effect on the economy," Mr Trichet told the Economic and Monetary Affairs Committee.
"The overall degree of monetary accommodation delivered by the ECB was more ample, albeit back loaded, because it was more persistent," Mr Trichet said during his quarterly testimony.
The ECB has faced criticism from European politicians particularly during the French presidential election for paying too much attention to inflation and not enough to growth.
The central bank under European Union treaty is required to tackle inflation first and foremost. Mr Trichet said this mandate has convinced businesses, individuals and financial markets that price gains in the euro zone will be moderate.
As a result, the euro zone has absorbed inflation shocks well. This in turn gave the ECB more freedom to flood its economy with cheap money after the 2001 high-technology stock crash.
"Of course, keeping our interest rate at an unprecedented low level for over 2 years would not have been a feasible policy without consistent signs that (inflation) expectations were well anchored and the inflationary shocks that were hitting the economy at the time of the downturn were being quickly absorbed," Mr Trichet said.