Dangerous emergency response

Interest rates: Less than three months into the year, the global economy has suffered its second big shock. After the Middle East oil price spike, Japan's earthquake and nuclear crisis have provided another jolt. The talk is of a global policy response. But to delay tightening would be a bigger mistake.

Interest rate expectations in Europe and the United Kingdom, as implied by the futures market, have dropped. Christian Noyer, a member of the European Central Bank's Governing Council, says the bank must consider Japan's impact when deciding whether to go ahead with its expected April rate hike. In the United States, there is even talk of the Federal Reserve opting for a third round of quantitative easing when the latest bout of money-printing ends.

True, the impact of Japan's terrible emergency and high oil prices must be considered. But policymakers have a habit of over-reacting to emergencies. The Fed under Alan Greenspan did just that in response to the Asian crisis and Russia's default in 1998 - helping to launch U.S. stocks into the final insane burst of the dotcom bubble. Cutting rates after the attacks of Sept. 11, 2001 laid the foundations for the credit boom. The same mistake could easily be repeated now. Even before Japan there was talk of further policy loosening. Dennis Lockhart, president of the Atlanta Fed, said earlier this month that high global oil prices might warrant further money printing and bond buying.

But part of the reason that oil prices are so high is because of fast growth in emerging economies, and the improvement in the United States and Europe. Monetary stimulus has worked - but policymakers may already have overdone it. More laxity would feed further speculation.

That, in turn, would create a great danger for the global economy. Emerging countries such as China, India, Brazil and South Korea are already grappling with rising inflation; so, too, are the UK and euro zone. Delaying the response could require a much sharper and painful adjustment in the future.

Japan’s predicament is frightening. But unless its nuclear crisis gets significantly worse, it is unlikely to derail the global recovery. Indeed, the earthquake may even add to inflationary pressures as supply chains are disrupted and Japan rebuilds. One catastrophe should not frighten global policymakers into a disaster of another kind.