The ECB raised EU interest rates yesterday to 4.25% as expected.
The stated rationale is to control inflation in the medium term (18 months). That’s the accepted wisdom anyway. But mostly its a signal to the market. Interest rates have been relatively stable over recent years and much of the volatility is underpinned by leveraging balance sheets more than history suggests is reasonable – whether that is banks’ capital ratio or trader’s margin requirements.
But inflation is being driven by the cost of oil (more than the discount value of time) whose price increase is leveraged through most of our consumption from food to cars. It has been a very inexpensive replacement for natural power. And it seems that a slowdown in consumption is already upon us, driven by both rising oil prices but more importantly a rapid tightening of credit.
The challenge still remains to implement policies which will encourage development of alternative consumption patterns which give high value, but have a low impact on the planet. Unfortunately standard economic metrics are not sophisticated enough to measure this so policy makers and politicians are still pushed to encourage “growth” when it is quite plain that humanity has outgrown the planet and we need to consumer less (as a species). It is necessary to educate ourselves, populations and administrations alike, of the need to move beyond gdp and look at other indicators like quality of life.