from Geo-Graphics

ECB Rate Cut a No-Brainer; Also, for Many, a No-Gainer

November 6, 2013

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Back in April, we showed that the eurozone countries most in need of lower corporate borrowing rates benefited only marginally from ECB rate cuts. Today’s Geo-Graphic shows that little has changed in this regard; the financial crisis has clearly done serious and lasting damage to the monetary transmission mechanism in Europe – particularly as it affects Greece, Portugal, Spain, and Italy.

In April we also showed that the GDP-weighted inflation rate of the countries where the monetary transmission mechanism was working normally – Austria, Finland, France, Germany, and the Netherlands – was 1.8%, right near the ECB’s target of just-below 2%. Thus, the countries that most needed lower borrowing rates needed much more than an ECB rate cut to boost business lending, whereas those where business lending was responsive to ECB rate cuts were not clearly in need of one – at least according to the ECB’s inflation criterion.

Inflation in the strong countries, however, has declined significantly since then – it now stands at a GDP-weighted 1.5%.

This means that a rate cut at the ECB’s November 7 governing council meeting should be a no-brainer. Sadly, our Geo-Graphic suggests it will also be a no-gainer; the ECB will have to take far more aggressive action to prod business lending in the worst-hit crisis states.

Financial Times: ECB Weighs Up Options Amid Concerns Over Falling Prices

Bloomberg News: Draghi Weighs Whether Rate Cuts Too Valuable as ECB Meets

Wall Street Journal: A Call to Arms for the ECB

The Economist: Waiting for the Cut

 

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More on:

Europe and Eurasia

Monetary Policy

Ireland

Italy

Portugal

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