Monetary authorities in developed economies want to get the economy growing. They must be careful.

The European Central Bank left the policy rate at 1.5 per cent on Thursday, but the rhetoric from Jean-Claude Trichet, the outgoing president, left room for a cut soon, even though the current inflation rate is 2.5 per cent. The Bank of England also did nothing, but continues to push for growth with a policy rate at 0.5 per cent, well below the 4.4 per cent inflation rate.

Investors had hopes of even more easing on Thursday, but they love low rates, which tend to push up bond and commodity prices. Share prices would also probably rise if it were not for the weakening global economy – the Organisation for Economic Co-operation and Development expects gross domestic product in rich countries to increase at less than a 1 per cent annual rate in the second half of 2011.

If central banks were squeezing the money supply, they could be blamed for the slowdown. But the negative real rates show that monetary authorities, in Washington and Tokyo as well as Frankfurt and London, are going in the opposite direction. They are trying hard to keep credit cheap and available.

It requires a leap of faith in the power of money to think that still looser policies will improve the position of strained governments, stressed banks or weak politicians. But no credulity is required to fear adverse effects. Easy money slows down growth by keeping commodity prices high – Brent crude oil is still above $110 a barrel. That slows down growth and keeps trade unbalanced. Also, it leads to a politically ugly combination of low yields on savings and richly rewarded financiers.

This month, two central banks chose inaction. Despite the fervent hopes of investors, that may be the best path from banks that can now do more harm than good.

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