Draghi will not hesitate to zero ECB’s basic interest rate

European Parliament. Committee on Economic and Monetary Affairs (ECON) meeting. Hearing with Mario Draghi, ECB President but also as Chairman of the European Systemic Risk Board. (EP Audiovisual Services).

European Parliament. Committee on Economic and Monetary Affairs (ECON) meeting. Hearing with Mario Draghi, ECB President but also as Chairman of the European Systemic Risk Board. (EP Audiovisual Services).

Combining what Mario Draghi, the President of the European Central Bank, said yesterday about low inflation projections and the Governing Council’s forward guidance of the economy, the conclusion one can draw is that, the ECB’s basic interest rate will remain at its present (0.25%) or lower levels for the next two years, at least well into 2015. By the way, the Governing Council left this rate unchanged yesterday at the above level, which was set early in November, when it was reduced from its previous 0.5% setting.

Traditionally ECB’s Governing Council holds its monthly meeting the first Thursday of every month. Yesterday the council was also attended by the Commission Vice-President, Ollie Rehn, responsible for Economic and Monetary Affairs and the Euro.

The reduction of ECB’s basic interest rate from 0.5% to 0.25% last month attracted a tsunami of reactions from Germany, objecting to this small decrease of the cost of money, on the grounds that it reduces the incentive to save. However, a quarter of a percentage unit less interest cannot really affect savings. In any case Germany, with its austere economic ideology, doesn’t favour cheap money. On top of that this country is nowadays awash in cash.

Not any more Germany’s ECB

But it was not only that. Almost the entire financial sector of Germany then rose to its feet for one more reason. It was the first time that the ECB, under the strong leadership of Mario Draghi, took exactly the opposite decision, from what the two German members of its Governing Council had longed for. Jörg Asmussen and his compatriot Jens Weidmann President of Deutsche Bundesbank, both voted against the reduction of the interest rate. As it was left to be understood later on, the two considered this step as premature. For the first time however they couldn’t manage to secure enough votes to support their opinion.

This must have been the reason that Draghi, when answering the first question from journalists yesterday, commenced his response like that: “First of all, our decision to cut rates in November has proved to be fully justified. Our monetary policy stance will remain accommodative for as long as necessary, and will thereby continue to assist the gradual economic recovery in the euro area”. In this way he wanted to tell Asmussen and Weidmann two things. Firstly that the two Germans were wrong and they had better admit it. Secondly he clarified that the ECB wouldn’t any more follow the German Bundesbank’s policy line avoiding to support the real economy to grow.

Cheaper money for growth

Berlin insists that ECB has only one mandate to serve: to keep inflation at bay. Nowadays though, Eurozone’s problem is exactly the opposite; very low inflation, falling short from ECB’s target set at bellow but close to 2%. In October Eurozone inflation fell to 0.7% and seems to have gained two decimal points in November at 0.9%. ECB’s economists predict even less inflation next year. According to Draghi, “Eurosystem staff macroeconomic projections for the euro area foresee annual Harmonised Index of Consumer Prices (HICP) inflation at 1.4% in 2013, at 1.1% in 2014 and at 1.3% in 2015. In comparison with the September 2013 ECB staff macroeconomic projections, the projection for inflation for 2013 has been revised downwards by 0.1 percentage point and for 2014 it has been revised downwards by 0.2 percentage point”.

It’s more than certain then that inflation will continue to remain at subdued levels all along the next two years. If this will be the case, ECB’s interest rates will remain at its present (0.25%) or even lower rates. Judging Draghi from his decisiveness last month to lower the cost of money to near zero levels, despite the strong opposition from Germany, if need appears, he will manage to secure a majority in the Governing Council for zero interest rates. Probably he will not hesitate even to reduce the bank deposit facility rate from presently zero to negative levels. This last rate is the interest banks get when depositing their money with the ECB. Not to forget that the central bank is the bank of banks.

All in all Draghi will long to increasingly employ the monetary policy to support the real economy and more so in the worst hit countries, despite what Germany says.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Libya: EU efforts should focus on protecting migrants, MEPs say

This new way of understanding disease is changing medicine

Action needed to end deadly clashes between African herders and farmers: UN chief

The four top Americans who flew to Europe perplexed things about Trump’s intentions

“A Junior Enterprise is run only by students.. there are no professors or managers that can help you solve your problems”

EU-India summit: Will the EU manage to sign a free trade agreement with India before Britain?

Africa-Europe Alliance: first projects kicked off just three months after launch

The German automotive industry under the Trump spell

Fight against climate change and poverty will fail without overhaul of global financial system, says major UN report

Eurozone closer to a deflation – stagnation trap

Why Commissioner Rehn wants us all to work more for less

Syrian Refugees in Germany face distinctly different challenges than those in Lebanon

Consumers suffer three defeats

Is a full course lunch, a new Commissioner and 2 million anti-TTIP citizens what you would call a “Fresh Start”?

What we take for granted: The EU is not perfect

Who the US and China have trade disputes with

EU makes key TTIP document public as protests get louder

ILO’s Bureau for Employers´Activities to publish new study on women in business and management

3 autonomous vehicle trends to follow in 2019

Second Facebook-Cambridge Analytica hearing: impact on privacy, voting and trust

This is what a planet-wide network of ocean sanctuaries could look like

EU budget: the Common Agricultural Policy beyond 2020

‘Global care crisis’ set to affect 2.3 billion people warns UN labour agency

Guatemala: UN anti-corruption body will continue working, as Constitutional Court blocks Government expulsion

COP21 Breaking News_03 December: Unprecedented Global Alliance for Buildings and Construction to Combat Climate Change

Why the ECB prepares to flood the markets with more and free of charge euro; everybody needs that now

This is our chance to completely redefine the meaning of work

Greece and Ukraine main items on EU28 menu; the course is set

Eurozone: The crisis hit countries are again subsidizing the German and French banks

The Indian miracle state pointing the way to global sustainability

EU Commission: Germany can make Eurozone grow again just by helping itself

Chinese Premier Li Keqiang’s speech from World Economic Forum’s Annual Meeting of New Champions

Press coverage of migration crisis in Europe: a call for collaborative action

Parliament demands ban on neo-fascist and neo-Nazi groups in the EU

Climate change recognized as ‘threat multiplier’, UN Security Council debates its impact on peace

2 trillion drinks containers are made every year – so where do they go?

Water supply a human right but Greeks to lose their functioning utilities

Darfur: Inter-communal tensions still high despite improved security, Mission head tells Security Council

Brexit: when the hubris of one man can set the UK, the EU and the entire world on fire

Marking Sir Brian Urquhart’s 100th birthday, UN honours life-long servant of ‘we the peoples’

Mandela, ‘true symbol of human greatness’, celebrated on centenary of his birth

ECB’s first flight in Eurozone’s banking universe will be just a reconnaissance

Syria: ‘Violence, displacement’ and cold kill 11 infants ‘in the past two days’

Tuesday’s Daily Brief: Bicycles for the environment, new leader for the UN General Assembly, UN values, Ebola, Syria and Libya

EU-China Light Bridge in Brussels signals the bright coming of the Year of The Dog

‘Never give up’: UN chief urges all who serve, marking UN Day

Venezuela: UN human rights office calls for ‘maximum restraint’ by authorities in face of new demonstrations

The EU Commission does nothing about the food retailing oligopoly

MEPs want to ensure sufficient funding for Connecting Europe’s future

We need to talk about failure in the social sector

Long live Eurozone’s bank supervisor down with the EU budget supremo

Why Obama asks approval from Congress to bomb Syria?

UK voters sent strong message to May and Corbyn for soft Brexit

COP21 Breaking News_05 December: Ban Ki-Moon Closing Address at COP21 Action Day Innovation, Imagination, Faster Climate Action

The 28 EU leaders show contempt for the European Elections results

WEF Davos 2016 LIVE: “No other problem has jeopardised the EU as much as the refugee question” Joachim Gauck, President of the Federal Republic of Germany, cries out from Davos

Love unlimited

Medical students of today, technological doctors of tomorrow

Why Eurozone urgently needs the ECB to print and distribute at least €500 billion

European Youth Forum welcomes the European Commission’s proposed revision of the Union Code on Visas, however it does not go far enough

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s