by Jerome a Paris
Thu Nov 6th, 2008 at 09:46:40 AM EST
As expected, the European Central Bank has lowered its main interest rate by 0.50%, following a similar move by the Swiss National Bank and a much more spectacular 1.5% move down by the Bank of England.
The markets, which had cheered the BoE's spectacular move, dropped again after the ECB's minimalist move, proving once again that cheap debt is the stock markets' drug of choice.
Expect the jeremiahs to once again complain about the ECB's hopeless rigidity, even though the graph above suggests that it has conducted a monetary policy which has been both loose (with real interest rates only above zero in the boomiest boom times) and flexible (closely related to - and usually slightly anticipating - eurozone inflation).
Like the Bundesbank before it, the ECB does not like to be prodded by the markets, and the FT article linked to above notes that "the ECB seems to have decided that a larger cut might have appeared a panic reaction." Today's move nevertheless suggests a strong change of mind about the dangers of inflation in the eurozone, or at least a desire to avoid any hint that monetary policy be seen as an obstacle to macro economic decisions to fight the coming recession.
Still, with a large chunk of eurozone long term retail lending (like mortagages) done on the basis of interest rates set by the long-dated bond markets, to which is added the cost of liquidity of banks, lending costs will not be going down by as much for households and businesses - and lending volumes are constrained by banks' desperate attempts at deleveraging as well as their sudden aversion for risk. Once again, this will help the commercial banks (and the large companies able to tap money markets) more than anything else.
There is a lot of talk about deflation amongst the Serious People. Crashing asset prices and deflation are not quite the same thing - but it is of course in the interest of the rich (who own an even bigger share of assets than they get of incomes) to conflate the two, once again. Thus the only truly evil inflation is made to be income increases and the only truly evil deflation that of assets.
The ECB has fought that logic more than other central banks, but the pressure seems rather strong now.
