ECB sticks with tight policy

The ECB kept interest rates at 4% and stated that they have a tightening bias. With inflation moving higher and growth declining, the ECB is between a rock and a hard place with their choices. Stop inflation by at least holding the line on rates or cut rates to stimulate growth. They have continued with their inflation bias in spite of the continued turmoil in the credit markets and the increasing likelihood of a US recession. So much for coordination of monetary policies in the G10.

A tight ECB policy will be dollar negative from a capital flow perspective. The rate differential will be favorable for Europe; however, anything that forces growth lower in Europe will be negative for equities. This policy choice places a greater burden on emerging markets to drive global growth.