The European Central Bank has cut interest rates to a record low of 1.5 percent and although it’s expected to cut further to 1 percent by mid-year, this still means benchmark borrowing costs in the euro zone will be higher than the UK, the US, Canada and Switzerland, where official rates are already at 0.5 percent or lower.

But euro zone residents are actually enjoying more favourable credit conditions than the ECB’s “official” rate, the main refinancing rate, would suggest. 

 The Commerzbank branch opposite the ECB’s Frankfurt headquarters is offering mortages at a five-year fixed rate of just over 3.5 percent,  two percentage points cheaper than the average cost just a few months ago.  This is partly because the ECB, in addition to cutting rates, has flooded money markets with liquidity, meaning banks can borrow money amongst themselves more cheaply than the official benchmark rate.

  Economists I’ve spoken to in the last few months have dubbed this a de facto zero interest rate policy, or ZIRP by stealth.

Average overnight interest rates or EONIA, which would normally track the main refi rate, have fallen steadily in the last few months arnd are down to below 0.9 percent, while Euribor three-month market rates are around 1.6 percent.

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Even ECB policymakers such as arch-hawk Axel Weber say that the ECB’s overnight deposit rate, which is set one percentage point lower than the refi rate at 0.5 percent, has taken over the role as the floor for money markets, while the refi rate is acting as a ceiling.

One more 0.50 percentage point rate cut could take this rate down to zero, putting money market rates on a par with those in other regions while still allowing the ECB to keep to the moral high ground and argue that it is keeping up its guard against future asset price bubbles and inflationary pressures.

“If they go to 1 percent for the refi and put the deposit rate at zero, it means we would have an overnight money market rate at 0.2-0.3 percent, which would be for all intents and purposes a zero monetary policy,” Bank of America Merril Lynch economist Gilles Moec said.