ECB Suggests Rate Cut May Be Imminent
One way of stimulating an economy is to make the cost of borrowing cheaper, but with many central bank lending rates still at or near historic lows, the power of such a move must be limited. The effect of “cheap(er)” money should also be to increase inflationary pressure within the economy.
The main ECB interest rate is at 0%, so a further cut would actually take it into negative territory. It is not immediately clear what that would mean for borrowing from the bank – nominally, they would pay you! The deposit rates at the bank (the money that commercial banks make by holding their assets with the bank) currently stand at 0%, 0.25% and -0.4% (depending on the conditions for the deposit). The negative rate in this context was designed to encourage banks to lend money rather than hold it on deposit.
Mario Draghi, ECB President suggested that “mitigating measures” may be required, yesterday. It has been suggested that some banks would need protection from lower (more negative) rates, a mechanism known as tiering, although this remains contentious.
Draghi noted: “If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfill our mandate. And we will do so again to answer any challenges to price stability in the future.”
The ECB stresses that (within reason) it does not target the exchange rate between the Euro and other major currencies. There is talk of the US Federal Reserve cutting rates which would have the effect of depreciating the Dollar against the Euro. The exchange rate does effect inflation and economic growth which are both factors the ECB does concentrate on, of course. Inflation in the Eurozone is projected to hit 1.6% in 2021 which is significantly below its target value of 2%.
The ECB’s talk of a potential rate cut sent the Euro lower against the Dollar and earned the ire of President Trump: “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others”.
The fact that Trump has been agitating for an interest cut by the Federal Reserve which would weaken the Dollar, did not seem to Mr Trump to be hypercritical, of course.