The ECB

Remember when investors held their breath before every rate decision? They need not have turned blue after all – we now know that global central banks had as little clue about the economic outlook as the rest of us. Today many decisions are even less consequential now that benchmark rates are hovering close to zero. The European Central Bank, however, still carries on as if half a percentage point here or there really matters.

That is partly because it was extraordinarily late in cutting rates, worrying about inflation as the world imploded around its ears last summer. Four cuts down the road, the ECB meets again on Thursday with the main refinancing rate still at 2 per cent. Unfortunately, experience in the US suggests that pushing rates towards zero will do little to spur demand. But at least having 200 basis points up its sleeve means the ECB retains some capacity to shock.

Will it go boo? Most expect a chop of only half a percentage point, pretty much par for the course since the meltdown began, save a 125 basis point rush to the head last November. The ECB will no doubt feel that is an adequate response to probable downward revisions to eurozone growth and inflation forecasts by its own staff. Hitherto, these backroom economists have been in cloud cuckoo land, expecting a mere 0.5 per cent fall in output for this year. But given the horrible data of late, a revision to a fall of 2 per cent in growth is expected.

Alas, eurozone growth will probably fare even worse than that, leaving the ECB behind the curve yet again. So why not cut a full point, or more? Bundesbank president Axel Weber reckons rates should not fall below 1 per cent. After all, the rate at which banks lend to each other overnight is well below that anyway, partly reflecting the ECB’s emergency deposit facility.

Others, such as former Federal Reserve economist and governor of Cyprus’s central bank Athanasios Orphanides, say zero is nothing to be afraid of, provided the full kit of other monetary tools are employed. That view is gaining traction. Either way, 50bps no longer cuts it.

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