Growing pains for European bank

Unlike its American counterpart, the Federal Reserve, the European Central Bank has taken an ultra-cautious stance on interest rates. Whereas the Fed has cut rates seven times this year to avert a hard landing, the ECB has eased monetary policy just twice this year, including today's 0.25% cut.

Criticism of the bank's hardline stance on inflation is reminiscent of that levelled at Fed chairman Alan Greenspan at the beginning of the 1990s. He was criticised for fighting the last economic war by focusing too narrowly on inflation at a time when production costs were being brought down by a combination of technological innovation and globalisation. American workers lived in fear that companies would move their plants to developing countries where labour and other costs were cheaper. Such fears helped to dampen inflationary pressures.

But the Fed and Mr Greenspan did adapt to the times. As President Bill Clinton reined in public spending, the Fed brought down interest rates and paved the way for a decade of economic expansion, the longest period of uninterrupted growth in American history. Of course, the ECB is not the Fed and circumstances are different.

Mr Greenspan was free to take the action he did only after having convinced the markets that he was ready to quash inflation as soon as it glimmered. The ECB is a new creature and is still trying to establish its own credibility. Its case has not been helped by its president, Wim Duisenberg, who has dropped a few clangers. On one notable occasion, he told the Times that the ECB would not intervene to support the euro, sending the fledgling currency tumbling.

For now, the ECB is still very much focused on inflation despite anaemic growth in euroland. Yesterday, Horst Welteke, president of Germany's Bundesbank and a member of the ECB's council, stressed that the bank's priority was fighting inflation rather than encouraging growth.

"The ECB council does not have the mandate to steer growth but to keep the value of money stable," he said. "The ability to fine-tune growth is clearly over-estimated, the lags with which monetary and fiscal impulses work underestimated."

Be that as it may, the bank cannot avoid economic realities. There is little growth in Europe, the US economy is in trouble and Japan remains stuck in the economic doldrums of the last 10 years. While inflation remains higher than the bank target of 2% - consumer prices rose by 2.8% in July - there seems to be latitude for the bank to ease credit. Germany has recently become more vocal in wanting the ECB to lower rates as it teeters on the brink of recession. German chancellor Gerhard Schr?der has all but admitted that the economy will fall short of the government's growth target of 2%.

The bank has also attracted criticism because markets find it hard to "read" the bank. The Fed drops enough hints of its decisions that there no nasty surprises. The ECB has yet to manage expectations with the same degree of skill. Striving for more transparency, the ECB recently published a 160-page book, written out by senior bank members to give an overview of bank decision making. Though hardly bestseller material, the effort reveals that the ECB aims to be a listening bank.

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