ECB takes (a little) action


"It's like opening the windows in a convertible when the top's already down". That is how one market commentator has described the European Central Bank's (ECB) widely anticipated rate cut: Welcome, maybe, but unlikely to bring a big change in the weather for the periphery economies currently locked in the boot.

The euro rose in value, around the time the rate decision was announced, only to fall through the floor later on during the ECB President's press conference, falling 0.7% against the dollar in not very much time at all.

Does that market reaction make any sense? Not really. Long-term, as I've argued in the past, it's hard for most economists to see the eurozone's 17 economies coming through this without a weak currency.

Rebuilding their competitiveness within the eurozone is hard enough for the periphery countries, without the added disadvantage, in world markets of a strong exchange rate.

That is one reason why you might be puzzled that the euro has usually gone down at the worst moments of the crisis - and risen in value when policy makers seem to be pulling together.

But that is a long-term issue.

Further action?

Today's fall in the value of the euro is surprising for a different reason - because it suggests that financial markets think the ECB is preparing to take more dramatic steps to support the eurozone economy.

That is quite possible. But I did not hear much in Mario Draghi's press conference to suggest it is now a lot more likely than it was before.

He said the ECB was "technically ready" to take the interest rate on its deposit facility into negative territory - in other words, to charge banks to park their cash with the central bank.

Interesting, but he's said it before.

He also said the ECB had "decided to start consultations with other European institutions" on measures to promote non-bank lending to companies by trying to revive that side of the asset-backed securities market.

On guard

Many had been hoping the ECB would move in this direction. But it's been talked about for months.

And Draghi later stressed that the consultations had not got very far.

In general, he seemed to want to talk down expectations of more unconventional measures from the ECB, not ramp them up.

It's possible the euro fell, not because of any of these comments, but as a result of the ECB President's general insistence that the ECB remained "ready to act" if further bad economic news suggested it was warranted.

So, investors might think, this might be the first of several cuts in the various interest rates that the ECB controls.

In the wings

Maybe. But standing "ready to act" has been the ECB's watchword for a long time now. It was "ready to act" with the Outright Monetary Transactions for the crisis economies last summer - with miraculous consequences for European financial markets.

It's been a while since it did a lot of acting.

The refinancing rate that the ECB cut today has been at 0.75% since last July: Higher than the Federal Reserve's main policy rate, and the Bank of Japan's, and the Bank of England's. It was 1% until December 2011.

The European Central Bank has cut its key interest rate by one half of one percentage point, in 17 months. In those 17 months, inflation in the eurozone has fallen from 2.7% to 1.2%, and the eurozone economy, overall, has shrunk by around 0.75% - with much steeper falls in the crisis economies and at least another year of recession predicted for many countries.

Puzzle all you like about what the ECB might be about to do next. We shouldn't forget to be surprised that it has taken so long to do even this.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 16.

    13 Bill
    "Oil priced in dollars will rise in cost, affecting everything."

    As Steph has said above, inflation in the Eurozone is just 1.2%, so a weakened Euro would be good for them.

  • rate this

    Comment number 15.

    What do you call an Skoda with an open top roof?
    A skip.
    or is the Eu?
    No i prefer skip.

    The ECB is waiting to act, hope its not in Viva Forever!

  • rate this

    Comment number 14.

    @ 10.JayBee
    Thanks for the perceptive contribution.
    Just why are the English unable to cope with the idea of the EU being a success?
    Something to do with lack of language skills, or the loss of the empire?

  • rate this

    Comment number 13.

    Has this been decided in order to keep the Euro scheme together or merely to keep Germany happy? A weakened Euro due to the rate cut will make Germany's exports cheaper, and the southern states' imports dearer. Oil priced in dollars will rise in cost, affecting everything. In the words of a previous French Eurocrat "If they have no bread, let them eat cake" Look what happened to her.

  • rate this

    Comment number 12.

    Let's see now:

    a) UK and US both cut interest rates to ludicrously low levels - years of that and no apparent recovery
    b) UK and US both start printing money to inflate some proportion of their debt away - years of that and no apparent recovery

    The EU can only reduce rates - so why would that solve the problems of the Euro Zone and not the others?

  • rate this

    Comment number 11.

    The problem is the Euro and the technocrats in Brussels. The Euro is a straight-jacket around the weaker economies. There are too many bureaucrats in Brussels getting paid too much money - they have been empire-building for decades to the detriment of ordinary citizens.

    Their wages and expensive programs like the Common Agricultural Policy are bleeding the tax-payers dry.

  • rate this

    Comment number 10.

    Funny how the two countries that want the EU to succeed the most (France and Germany) bred two little upstarts who tried to unite Europe the hard way. This attempt will fail too.

    We know how to smack down little upstarts, we have a history of it.

  • rate this

    Comment number 9.

    And I consider BBC journalists as non-workers. Weren't they confused about unemployment going down but no-one spending. We workers know all about zero hours contracts and fiddled figures by the work programme, pretending to get people back to work. People like Ms Flanders and Mr Paxman are just elite group gossips pandering to politicians.

  • rate this

    Comment number 8.

    All the talk has been on the under-performing southern countries. What's going to happen as France deteriorate this year. I never read much about what austerity measures they actually introduced in the last few years. if any?
    In UK.US and EU won't good growth in new tech just be out-weight be run of the mill decline in western production V much cheaper eastern production.

  • rate this

    Comment number 7.

    Oh dear... this is like trying to catch smoke in a net; futile. It won't help the ailing economies.

    It might help hold the EU project together a little longer though, and I think that's the point. Never mind the unemployed, just protect the bureaucrats' dream.

  • rate this

    Comment number 6.

    I don't know anything about economic theory, but I think we have to get to a situation where working people benefit from their work. Too many pen pushers and bankers are ready to rip people off. The Eurocrats don't want to hurt the elite, but are happy to punish the workers.

  • rate this

    Comment number 5.

    It would appear that everyone knows what is required but nobody capable of making the decision the UK is classic large sections still living above their means oblivious to the consequences and in complete denial but like greece or Spain the reality may one day come home

  • rate this

    Comment number 4.

    The actions by the ECB, the BofE and Fed before it do nothing but hand cheap money to the criminal bankers that caused this whole mess in the first place.

    It will never filter through to the real economy and only serves to keep bankers in the lavish extravagant lifestyle they expect.

  • rate this

    Comment number 3.

    "It's like opening the windows in a convertible when the top's already down"... "unlikely to change the weather for the economies locked in the boot".

    Don't we just love these economic metaphors? Let's have some more. How's about 'crash' or 'accelerator' or 'overheating' or whatever. Lesson number one in The Enid Blyton Book of Journalism is that you can never have too many of 'em.

  • rate this

    Comment number 2.

    Neither the UK nor the rest of the EU are masters of their own destiny.

    Recovery in the US is going nowhere fast.

    Governments these days are apparently economically impotent.

    So, who's going to get us out of this mess?

  • rate this

    Comment number 1.

    I found this comment from Mario interesting:

    "The cut in interest rates should CONTRIBUTE to support a recovery later in the year."

    Does he know something that we don't - that the EU is going to do some sort of about turn on austerity. They might do something, but it is unlikely to be enough.


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