Orphanides breaks ranks with ECB’s rate strategy

Cyprus Central Bank Governor Athanasios Orphanides, a voting member on the European Central Bank Governing Council broke ranks with ECB President Jean-Claude Trichet arguing that the view of very low interest rates being dangerous is a "fallacy".
"The idea of such policy ineffectiveness is a fallacy," Orphanides said in a speech in Limassol last Thursday. "I should add that the fallacy that monetary policy is ineffective when short-term interest rates are close to zero is dangerous because it may promote inaction."
The comments directly contradict those made by Trichet in an interview with Bloomberg Television in Davos, Switzerland earlier in the day, when the central banker said that "very very low rates are inconvenient".
When asked about a more active monetary policy, including the so-called "quantitative easing" approach, Trichet once again pointed to the central bank's massive liquidity injections and expansion of its balance sheet over the last several months, adding that he "excludes nothing" regarding monetary policy down the road.
Trichet's comments were taken seriously given that recent rhetoric from the ECB's Governing Council suggests central bankers agree rates can go lower. However, Trichet highlighted that the Feb. 5 monetary policy meeting should not be given as much clout as the March meeting.
Orphanides, who has broad experience based on extensive academic research and background at the Federal Reserve has become the first ECB member to dismiss many of the arguments put forward by the governing council, including Trichet, on why rates should not be cut too much further, if at all – i.e. liquidity traps, negative real rates, running out of ammunition etc.
Specifically, he stated that "A central bank with a policy rate that is positive but rather low might be incorrectly advised to 'save its ammunition' so that it may still be in a position to ease policy later on… It may be desirable for central banks to take forceful and pre-emptive interest rate action aiming to minimise the probability that they may later find themselves in a situation where they will be forced to resort to unconventional policy easing …the fallacy that monetary policy is ineffective when short-term interest rates are close to zero is dangerous because it may promote inaction."