Dealing with the crisis on the Continent

Charles Goodhart is professor emeritus of banking and finance at the London School of Economics and an expert on European monetary policy. He spoke to The Times about Europe's handling of the economic crisis and the role of the European Central Bank, which joined Wednesday with central banks around the world in lowering interest rates. It was the ECB's first rate decrease in five years, from 4.25% to 3.75%, after keeping the rate elevated to ward off inflation.

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Should Wednesday's interest rate cut have been greater?

Interest rates are going to go on going down. And if one is so confident that interest rates are going to go down further, then why not do more now? There are a number of answers to that. One is that we still have inflation well over target. Another is if you get too far ahead of the market, you'll be accused of panicking. People will say, "Well, my God, if they had to cut 2%, it must be very dreadful out there." The third thing is if you're operating on your own, and you have a big current account deficit, you will find the exchange rate working against you.

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Would a bigger rate cut by the ECB or in Britain have been counterproductive?

If the U.K. had gone down 100 [basis points, or 1 percentage point] by itself, and everyone else was going down by 50, it would have suggested that the U.K. authorities thought the U.K. was in far worse position than everyone else, and it would have caused a sharp fall in sterling. . . . There has been a lot of criticism in Europe of the U.S. for having cut the rates so much faster, along the lines that it didn't do much good.

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Over the last few weeks, the ECB has repeatedly made more money available to European banks and has now cut the interest rate. Are these piecemeal and stopgap measures?

I think the ECB would rather take the opposite line. The ECB would argue that this has really been a crisis connected with liquidity, and what they have done is they have systematically made liquidity much more quickly and more reasonably available than the Bank of England, for example. Given the inflationary pressures in the world, it was right to keep interest rates up. They would criticize the [U.S. Federal Reserve] as not having done enough to expand liquidity and doing too much on interest rates.

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Couldn't you say that the ECB has been too focused on inflation?