24 October 2024

ECB cuts rate again

For the third time since June, the European Central Bank (ECB) has cut its benchmark interest rate by 25 basis points, bringing it down to 3.25%. This was not a surprise. Within the Eurozone, inflation has fallen to a low level and the economy has exhibited weakness. While the job market remains tight, wage growth has eased somewhat. Thus, from the perspective of the ECB, a loosening of monetary policy is warranted. It is likely that the ECB will continue to take such action in the months to come.

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The recent inflation numbers in the Eurozone were better than the ECB had forecasted earlier this year. Christine Lagarde, president of the ECB asked, “Have we broken the neck of inflation? Not yet. Are we in the process of breaking that neck? Yes.” Her hesitation to declare victory likely reflects continued strong growth of prices of services, which reflect rising wages in a tight labor market.

Still, if Lagarde does not believe that inflation is defeated, why is she pursuing a policy of monetary policy easing? The likely answer is that she and her colleagues are concerned lest the lagged impact of a tight monetary policy push the Eurozone economy into a downturn. It is clearly very fragile while the hope is that easing policy will provide some support to credit creation.

Finally, although domestic demand in Europe is weak, exports had been seen as a potential source of offsetting growth. Yet it is reported that, in August, EU exports to China were down 11% from a year earlier, likely a reflection of weak domestic demand in China. It is hoped that a potential Chinese government stimulus might reverse this trend.