Colm McCarthy: Little hope for state of the union
We need a fully fledged monetary union like in the US or risk further financial crises
When central banks cut their policy interest rate, this is meant to cut the cost of funds to banks and work through the financial system, resulting in greater, and cheaper, availability of credit. Central banks around the world have cut rates sharply, almost to zero, since the onset of the Great Recession and some have gone further, resorting to direct interventions to stimulate private sector credit.
At its meeting in Bratislava on Thursday the European Central Bank decided to cut its principal policy interest rate from 0.75 per cent to 0.5 per cent, the lowest it has ever been. ECB president Mario Draghi explained the move as a response to the continuing signs of recession and the weakening threat of price inflation.
The rate reduction is small and there would be limited impact if it worked through in the normal way. But the eurozone has become so dysfunctional that the move is unlikely to improve credit conditions in those countries that need more (and cheaper) bank lending. In Ireland, the move could actually result in increased lending rates for many borrowers.