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Eurozone reforms ‘too little, too late’

by International Commercial Investment on September 5, 2014

Source: What Investment

Williams commented, ‘Today’s ECB moves are a step in the right direction, but too little, too late to snuff out deflation risk and kick-start growth.’ 

The remarks came in the context of the ECB announcing further cuts in interest rates, with the base interest rate now 0.05 per cent, a historic low. 

The deposit rate, which is the rate the European Central Bank charges commercial banks to deposit money with it, has been cut to minus 0.2 per cent from minus 0.1 per cent. This means that it would cost a commercial bank cash to leave money on deposit with the central bank. 

Williams added, ‘The ECB hopes that the negative deposit rate will deter banks from parking cash at the ECB – instead passing it on to consumers and firms. But this may be a red herring, given still-tame credit demand and pressure for the banks to pass stress tests.’ 

While this rate cut was unexpected, it did not go as far as Williams and others had hoped, in that the central bank did not instigate a policy of quantitative easing (QE) in the same manner as has been deployed in the UK and the US. 

Such a policy would inflate the price of assets, such as property, and also of stock markets. This policy may not appeal to some of the larger or better-off Eurozone economies, such as Germany. 

Ben Bretell, senior economist at Hargreves Lansdown, commented, ‘A ten basis point cut to the ECB’s three main interest rates certainly surprised markets, with the euro weakening sharply on the news. However, beyond the effects of a weaker currency, it is hard to see lower interest rates stimulating the economy when the monetary policy transmission mechanism is clearly broken. How can lower rates encourage more borrowing when banks are unable (or unwilling) to lend?’

The Bank of England also announced today that it was leaving interest rates, which have been at 0.5 per cent since May 2009, unchanged for another month – a decision that was widely expected by the markets.

International Commercial InvestmentEurozone reforms ‘too little, too late’