The European Central Bank has done well to cut its benchmark interest rate by a quarter of a percentage point to 0.25 percent. The rate it charges banks for their regular borrowing operations has also been cut a quarter of a percentage point to 0.75 percent, while the rate offered for deposits by banks remains at zero.
The monetary policy objective of the ECB is to keep prices stable, and the recent signs from the euro zone as a whole were showing worrying falls in the inflation rate. For more than a few observers, the current risks in the monetary area have more to do with deflation than ensuring the ECB achieves its medium-term target for inflation of under but close to 2 percent. Annual inflation in October in the single-currency zone fell to 0.7 percent from 1.1 percent the previous month, below forecasts. That rate is indicative of the lethargy of domestic demand in the majority of countries, and in the absence of salary pressure.
To have done nothing and sought refuge in the argument that such a small reduction, given the equally tiny amount of room for maneuver, would have had scant effect would have been a sign of irresponsibility. Even more so when the ECB’s peers, including, of course, the US Federal Reserve, have assumed these interest rates for some time now.
The Fed even revealed that it would not be raising rates until the US unemployment rate falls to 6.5 percent. It is true that the ECB does not include the fight against unemployment among its goals, but the weakness of the recovery — as has been seen this week with the revised forecasts from the European Commission — suggest that all of the available viable decisions should be adopted in order to avoid a long period of stagnation, such as the one that affected the Japanese economy for more than 10 years.
What’s more, growth in exports in the euro zone found a powerful obstacle in terms of the appreciation of the euro. As such, one of the favorable consequences of the ECB decision is the depreciation of the single currency against the dollar. While the exchange rate continues to be high, exports outside the euro zone will find relief.
Plagued by problems
The attitude of the main European economic institution, which is more coherent with what is going on in the euro zone economies, does not mean that private-sector lending is about to get any cheaper, and certainly not any more widespread. Monetary policy continues to be plagued by problems, as is clear from the fear among lenders. But the fact that the ECB is maintaining a favorable attitude to growth is the necessary condition for confidence to return to the economy. For this to definitively take root, there is a need for signals that have a more direct influence on demand in the economies, so as to compensate the efforts of fiscal adjustment in the peripheral countries with more expansive decisions by the main economies in the bloc.