European liquidity worries.

• Position: Off the News - Brief Article

Senior European Central Bank strategists say the ECB has entered a several-month discussion period over monetary policy with the number one question being, what to do about the strong liquidity growth in the euro area? For some time, the institution had accepted the argument that the strong liquidity growth was due mainly to portfolio shifts and thus could be ignored. Not any more as the growth of monetary aggregates continues to move upwards.

This has caused the central bank to split into two camps. A sizeable minority of ECB members argues that the so-called "second pillar" of the ECB's charter--management of monetary aggregates--will lose all credibility unless the central bank eventually responds by tightening. A majority of members argue that if the institution changes policy based...