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

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

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

At last Britain considers a super-soft Brexit

Actions not words: what was promised at the UN’s landmark climate summit?

EU Budget 2019: no deal before the end of the conciliation period

How can batteries become more sustainable? This young scientist might have the answer

UK Labour Party leader Corbyn readies to change Brexit political backdrop

Why the way of loving closes doors of health?

Will Europe be a different place this Monday?

‘Unlock opportunities’ and pave the way for sustainable development, UN chief urges on World Population Day

ECB is about to lend trillions to banks

This company lets you set your own salary

Is the West gradually losing Africa?

5 ways to make your organization a great sustainability partner

Vegetarianism is good for the economy too

An FTA between EU-US to hurt South Korea

Deeper reforms in Germany will ensure more inclusive and sustainable growth

Alarming number of women mistreated during childbirth, new UN health agency figures show

Ensure that widows are ‘not left out or left behind’, UN chief urges on International Day

In visit to hurricane-ravaged Bahamas, UN chief calls for greater action to address climate change

Antitrust: Commission sends Statement of Objections to O2 CZ, CETIN and T-Mobile CZ for their network sharing agreement

Donor countries need to reform development finance to meet 2030 pledge

These Dutch microgrid communities can supply 90% of their energy needs

GSMA Mobile World Congress Americas

EU Commission: Once in every 20 beef meals you eat…horse probably with drugs in it

EU Justice Scoreboard 2018: justice systems’ key role in upholding the rule of law and EU values

From violence to dialogue: as land conflicts intensify, UN boosts efforts to resolve disputes through mediation

A Europe that protects: EU reports on progress in fighting disinformation ahead of European Council

New European frontiers for renewable energy development

Security Council approves ‘historic’ political Haiti mission, ending UN peacekeeping role in the country

Election-related violence claims 85 lives in Afghanistan: UN report

Tuesday’s Daily Brief: hate speech, dementia, Libya and Yemen, human rights in Brazil and Lebanon

Yemen blast kills 14 children, leaves others fighting for their lives in Sana’a

Brussels enraged with Swiss referendum result to keep out EU citizens

Climate Change: a challenge yet to be tackled in medical schools

Destroying nuclear waste to create clean energy? It can be done

Let your fingers do the walking

Australian solar could power Singapore within a decade

UN migration agency launches $10 million appeal to support hurricane recovery in The Bahamas

Better ID card security to curb document fraud

Why cooperative and competitive federalism is the secret to India’s success

Women’s leadership ‘critical’ to future of Niger

Trump asked Merkel to pay NATO arrears and cut down exports ignoring the EU

UN Mission in Haiti calls on protestors, authorities, to refrain from violence

How Abu Dhabi found a way to grow vegetables in 40-degree heat

Global Citizen-Volunteer Internships

Forests ‘essential’ for the future, UN agriculture chief spells out in new report

Israeli security forces’ response to Gaza protests ‘a recipe for more bloodshed’, says UN expert

UN postal agency ‘regrets’ US withdrawal

An analysis of the impacts of climate change on human health

Can Pakistan make its energy sector greener, cheaper and more reliable? The government thinks so

Draghi: Germany has to spend if Eurozone is to exit recession

UN, Egypt help avert another Israel-Palestine war in Gaza that was ‘minutes away’, Security Council hears

We must work together to build a new world order. This is how we can do it

‘Well-being of two million’ in Gaza at stake as emergency fuel runs dry: UN humanitarian coordinator

UN rights chief ‘strongly condemns’ attack on Indian security forces in Kashmir

How to provide health education and thus create better health systems

Tackling water scarcity: 4 ways to pull H20 out of thin air

For Africa, ‘winds of hope are blowing ever stronger,’ Guterres declares at conference on development

3.7 million lives could be saved by 2025 if health services ramp up nutrition actions: WHO

5 ways students can graduate fully qualified for the Fourth Industrial Revolution

Q and A on the draft digital copyright directive

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