Post by jeffolie on Nov 7, 2013 7:15:50 GMT -6
European Central Bank Cuts Main Rate
November 7, 2013
FRANKFURT — The European Central Bank cut its benchmark interest rate to a record low Thursday, moving more quickly than expected to stimulate the euro zone economy in the face of falling inflation.
The E.C.B. cut its main rate to 0.25 percent from 0.5 percent, which was already a record low.
Inflation in the euro zone unexpectedly declined to an annual rate of 0.7 percent in October, well below the E.C.B.'s official target of about 2 percent, raising the specter of deflation — a sustained fall in prices that can destroy the profits of companies and the jobs they provide.
The E.C.B.'s prime mandate is to defend price stability, which also means intervening if inflation is too low. But most analysts expected the E.C.B. to wait until December to act, once there was more economic data available.
Some economists have argued that falling inflation, coming after five years of recession or very slow growth, means that the euro zone faces an acute risk of deflation. While lower prices might seem like a good thing for consumers, in fact deflation is considered even more dangerous than runaway inflation.
When prices fall, consumers and businesses delay purchases, because they expect things to become even cheaper. Corporate profits decline, and companies are forced to pay their workers less. A spiral begins that is very difficult to arrest.
Deflation could be particularly destructive in Europe, where governments, banks and private households are still struggling with excess debt. When companies and individuals earn less, they have trouble repaying their debts, which remain the same.
It is unclear, though, what effect the rate cut will have when market interest rates are already effectively less than zero. At best, the cut signals that the E.C.B. will remain true to its mission of ensuring stable prices.
The cut could also cause the euro to fall against the dollar, because holders of dollars will earn lower interest rates. A cheaper euro would make European products less expensive abroad and help exporters.
The E.C.B. Governing Council probably also discussed other options Thursday as well, such as another round of very cheap three-year loans to commercial banks, perhaps with strings attached to ensure that the banks lend the money on to businesses and consumers.
The rate cut is likely to be controversial in Germany and risks alienating the euro zone’s largest economy. The view in Germany, and among some economists, is that there is no threat of deflation. This group sees slowing inflation merely as a sign that wages are falling in countries like Spain and Greece, where labor costs had become too high for companies to compete in the international marketplace.
It is likely that Jens Weidmann, president of the German central bank, the Bundesbank, argued vehemently against a rate cut.
Although the euro zone emerged from recession earlier this year, recent economic indicators have sent conflicting signals about the strength of the recovery. Few economists expect a strong rebound, but some have been more pessimistic than others, warning of long-term stagnation if the E.C.B. does not do more to stimulate lending and growth.
“There has been a big hoo-ha about this very modest return to growth,” said Simon Tilford, deputy director of the Center for European Reform in London. “Clearly the risks are mounting.”
In contrast on Thursday, Britain’s central bank kept its benchmark interest rate unchanged at a record low of 0.5 percent amid signs that the country’s economic recovery was gaining speed and consumer confidence improved.
www.nytimes.com/2013/11/08/business/international/european-central-bank-cuts-main-rate.html?_r=0
November 7, 2013
FRANKFURT — The European Central Bank cut its benchmark interest rate to a record low Thursday, moving more quickly than expected to stimulate the euro zone economy in the face of falling inflation.
The E.C.B. cut its main rate to 0.25 percent from 0.5 percent, which was already a record low.
Inflation in the euro zone unexpectedly declined to an annual rate of 0.7 percent in October, well below the E.C.B.'s official target of about 2 percent, raising the specter of deflation — a sustained fall in prices that can destroy the profits of companies and the jobs they provide.
The E.C.B.'s prime mandate is to defend price stability, which also means intervening if inflation is too low. But most analysts expected the E.C.B. to wait until December to act, once there was more economic data available.
Some economists have argued that falling inflation, coming after five years of recession or very slow growth, means that the euro zone faces an acute risk of deflation. While lower prices might seem like a good thing for consumers, in fact deflation is considered even more dangerous than runaway inflation.
When prices fall, consumers and businesses delay purchases, because they expect things to become even cheaper. Corporate profits decline, and companies are forced to pay their workers less. A spiral begins that is very difficult to arrest.
Deflation could be particularly destructive in Europe, where governments, banks and private households are still struggling with excess debt. When companies and individuals earn less, they have trouble repaying their debts, which remain the same.
It is unclear, though, what effect the rate cut will have when market interest rates are already effectively less than zero. At best, the cut signals that the E.C.B. will remain true to its mission of ensuring stable prices.
The cut could also cause the euro to fall against the dollar, because holders of dollars will earn lower interest rates. A cheaper euro would make European products less expensive abroad and help exporters.
The E.C.B. Governing Council probably also discussed other options Thursday as well, such as another round of very cheap three-year loans to commercial banks, perhaps with strings attached to ensure that the banks lend the money on to businesses and consumers.
The rate cut is likely to be controversial in Germany and risks alienating the euro zone’s largest economy. The view in Germany, and among some economists, is that there is no threat of deflation. This group sees slowing inflation merely as a sign that wages are falling in countries like Spain and Greece, where labor costs had become too high for companies to compete in the international marketplace.
It is likely that Jens Weidmann, president of the German central bank, the Bundesbank, argued vehemently against a rate cut.
Although the euro zone emerged from recession earlier this year, recent economic indicators have sent conflicting signals about the strength of the recovery. Few economists expect a strong rebound, but some have been more pessimistic than others, warning of long-term stagnation if the E.C.B. does not do more to stimulate lending and growth.
“There has been a big hoo-ha about this very modest return to growth,” said Simon Tilford, deputy director of the Center for European Reform in London. “Clearly the risks are mounting.”
In contrast on Thursday, Britain’s central bank kept its benchmark interest rate unchanged at a record low of 0.5 percent amid signs that the country’s economic recovery was gaining speed and consumer confidence improved.
www.nytimes.com/2013/11/08/business/international/european-central-bank-cuts-main-rate.html?_r=0