Business Irish

Friday 23 August 2019

ECB fires starting gun for September cut in interest rates

The headquarters of the European Central Bank (ECB) in Frankfurt, Germany. Photo: REUTERS
The headquarters of the European Central Bank (ECB) in Frankfurt, Germany. Photo: REUTERS

David Chance

The European Central Bank (ECB) has set the stage for an interest rate cut to below zero in September and the relaunch of its bond-buying programme, but there are mounting fears among experts that the extreme measures will not lift the ailing eurozone economy.

In a statement, the Central Bank said that it expected rates "to remain at present or lower levels at least through the first half of 2020", and that it was determined to act if inflation remained at current levels, which are hovering around 1pc.

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"We don't like what we see on the inflation front. Symmetry means we will act with the same determination whether inflation is above or below the inflation aim," ECB president Mario Draghi said.

The moves were widely anticipated but many worry that a re-run of the policies that saved the eurozone in the wake of the financial crisis will not be enough. It is feared the ECB is chasing an inflation target of 2pc, last hit way back in 2008, that is no longer applicable in a world of ultra-low interest rates and slow economic growth.

A poll by Chicago Booth University of some of the world's leading economists, including former IMF chief economist Olivier Blanchard and Nobel Prize winner Christopher Pissarides, as well as former Central Bank of Ireland governor Patrick Honohan, showed that 46pc of respondents agreed with the statement that "at this point, there is little that the ECB can do to increase or maintain output in the eurozone", while just 20pc disagreed or strongly disagreed.

Professor Honohan was one of the dissenting minority, saying that there was "still some unused powder and the ECB could restart quantitative easing, remove ceilings on sovereign debt holdings, and tilt purchases towards high-yield assets".

By contrast with the doubts over ECB policy, 62pc of the respondents agreed or strongly agreed when asked whether larger fiscal deficits were likely to increase demand and output when the economy was below potential, a clear signal that eurozone governments should use their budget firepower to boost the economy, and that the era of central banks acting alone to fight recessions is drawing to a close.

One critic of the current over-reliance on central banks, Simon Wren-Lewis, who is professor of economic policy at the Blavatnik School of Government at Oxford University, wrote that the clue to the reliability of so-called "unconventional" policies in ending a recession was in their name, and that these policies were untested except in the immediate aftermath of the global financial crisis.

"It is like having an accelerator on a car where how far you have to push your foot down varies from second to second. You will end up driving slowly, which in economic terms means a prolonged recession," he wrote in his influential economics blog.

Irish Independent

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