It’s European Central Bank day and we have it on very good authority that a quarter-point interest rate cut is on the cards, which will take rates to a record low 0.5 percent. A plunge in euro zone inflation to 1.2 percent, way below the target of close to but below 2 percent, has cemented the case for action.
In terms of reviving the euro zone economy this is pea shooter and elephant territory. The ECB has consistently diagnosed the key problem that already ultra-low interest rates are not transmitted to high debt corners of the euro zone, where lending rates are much higher and credit restricted. A rate cut won’t change that. It also illuminates the gulf in approach with the Bank of Japan and Federal Reserve who continue to print money at a furious rate.
The Fed said on Wednesday it would continue buying $85 billion in bonds with new money each month and added it would step up purchases if needed to protect the economy, dousing recent suggestions that the programme could be wound up in the months ahead. Nonetheless, a euro rate cut will help at the margins.
The ECB is also considering ways to help small- and medium-sized companies get easier access to credit. This is a thorny debate. There is clearly some internal opposition and even disinterested outsiders say it is an unusual thing for a central bank to get involved in. Don’t bet on it happening.
The really interesting point is that if the ECB fears deflation could take hold, all the arguments about what its mandate allows it to do (one reason it has not mimicked the Fed, BoJ and Bank of England in printing stacks of money) fall away and all sorts of expansionary policies are possible. If that fear doesn’t gain traction, then the ECB is reaching the limits of its policy response unless it gets an excuse to launch its bond-buying programme, which seems a distant prospect at the moment.