Tag Archives: Deflation

ECB rate cut: possible impact and effects

Mario Draghi and ECB Board decision of an interest rate cut last week surprised investors and markets. Traditionally, the European monetary policy institution rejected sudden rate cuts, but last inflation figures (from +1,1% in September to +0,7% in October for Eurozone) jointly with a strong appreciation of the Euro against Dollar (till its 2013 maximum in 1,38 $) were determined.

The immediate impact in the finance markets was positive: indexes rose as expected when such decisions are taken, but investors’ eyes are divided looking also the development of the other side of the Atlantic. Third quarter US GDP soared more than expected and increased the worries about a next tapering of the QE3 (that means, that the Federal Reserve could begin to shorten the current US debt buys to expand credit for a sooner reversal of the economic crisis). Markets changed the sentiment downwards.

The current situation of the monetary policy in the main world central banks is relaxing to push up the weak economies. Bank of Japan keeps the rate in 0%, the Fed near 0% and now ECB joins to the group not very far (0.25%). Analysts and experts have different points of view about the next consequences.

USB head for foreign exchange strategy, quoted by Reuters, sustained that ECB could have decided better the use of other instruments, as a negative deposit rate for banks, more long term cheap loans or even a quantitative easing, as in the US. These measures would have taken a bigger effect to push the credit flow, so USB expert, the main current worry for the monetary system. In the same way, a strategist of the private bank Berenberg, quoted by Spiegel, sustained that the cut “won’t hurt anything, but it also won’t do much either”.

The Economist also recalls that Mr. Draghi pointed “other artillery” if the rate cut weren’t enough. Japanese deflation and stagnation ghosts floated in Frankfurt last week. In any case, ECB moved perhaps because, as economist Paul Krugman says, the institution isn’t so sure that “Europe has turned the corner” of the crisis. However, it should be remembered that ECB mandate refers just to inflation control, not economic or employment improvement, as the Fed.