Why the European Bank Is Sitting Back

Monetary policy usually takes some time to bite. That is one explanation why the American stock market continued to gyrate on Tuesday after the Federal Reserve’s emergency rate cut. It may also explain why the European Central Bank has given no indication that it will follow suit.

But as it becomes apparent that Europe is feeling the slowdown in the United States economy, some analysts said the central bank’s relentless focus on inflation may be misplaced. Should stock markets continue to slide and further erode investor confidence, inflation would become the last thing the European bank needs to worry about.

“Conditions have changed dramatically of late and even from an E.C.B. perspective, this is not the time to worry about inflation,” Audrey Childe-Freeman at CIBC World Markets wrote in a note. “Failing to do so would risk to hit credibility.”

To decide on whether to review its policy, the European bank could look at decisions that it made after the burst of the dot.com bubble. The technology collapse kicked off several rate cuts by the Federal Researve, starting in January 2001. The European bank, however, was adamant that the spill-over to its economy will be limited, but by May was forced to follow suit and cut rates.

Ken Wattret, an economist at BNP Paribas in London, said there was a chance that the pattern would repeat. European bankers, he said, may wait for new data showing a clearer deterioration of the market before it moves but then it could cut rates soon.

Europe’s central bank did join the Fed and other central banks in December in injecting funds into the world’s money markets to bring back down borrowing costs between banks from seven-year highs. It was a coordinated intervention intended to secure liquidity in the financial system.

But when it comes to the economy, Europe remains optimistic it can decouple itself and withstand collateral damage from a possible recession in the United States. European stock markets made up some earlier losses in the afternoon and all of the major markets ended the day higer.

“People were pausing for breath” after heavy losses on Monday while the United States was still catching up, said Julian Chillingworth, chief investment officer at Rathbone Brothers in London.

Some senior European officials said the Fed rate cut did little to change their view on the global economy.