News Analysis

Tuesday 23 September 2014

Colm Kelpie: Draghi's latest move reflects gloomy outlook for eurozone economy

Published 08/11/2013 | 02:00

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IT had been hinted at for some days, so it's not entirely correct to deem yesterday's announcement from Frankfurt as a surprise. But prior to last week, further rate cuts from the European Central Bank (ECB) were all but written off.

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Troubled economies had been showing signs of stabilising, the crisis enveloping the eurozone had subsided, compared to where we were 18 months ago, and the bank's main borrowing rate was at a record low.

But that was last week. This week, we saw signs that the tentative recovery may already be faltering, with the European Commission cutting its growth forecasts, coupled with negative data on retail sales.

Throw in an unexpected slump in eurozone inflation to 0.7pc in October, well below the ECB's 2pc target, and pressure was intensifying on the Frankfurt-based body.

Maintaining price stability is the primary objective of the ECB, and a steady drop in prices raises the threat of growth-stunting deflation.

Despite this, analysts expected ECB President Mario Draghi to hold firm and resist any further cut, the first since May of this year, until December's meeting to establish if the fall in inflation would be sustained.

The immediate benefit for Ireland, apart from giving a boost to those on tracker mortgages, is that the euro fell in value, which will give a push to our exporting businesses.

The single currency slid as much as 1pc to hit a seven-week low of $1.34.

But the potential downside is that by cutting rates to a new record low, Mr Draghi is sending out a clear signal that euro-area policies are themselves hurting growth – France and Spain both had their growth forecasts revised down this week by the European Commission. Both are also on course to miss important deficit targets.

And while a fall in the value of the euro may be good for exporters, it will hurt the single currency's image in the eyes of investors.

Irish Independent

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