Thursday, July 5, 2012

ECB Rate Announcement

Said Mario Draghi: "Please heed me:
Our 'zone isn't going agreeably;
The better to serve you
In line with our purview,
We'll pay you to borrow if need be."

In an acknowledgement that things are bad all over, the European Central Bank has dropped its benchmark interest rates to record lows. ECB President Mario Draghi admitted in a press conference that his fears of a general slowdown in the euro zone have come to pass. Even such notable ECB hawks as Germany's Jens Weidmann have grasped the olive branch and joined in the unanimously dovish rate decision.

After a 0.25% reduction, the central bank's refinancing rate is now 0.75% and the overnight deposit rate, 0.00%. As Mr. Draghi reminded his listeners, this means that real (inflation-adjusted) rates are negative. At the same time, Europe's central banker is aware that any expansion of credit must be driven by demand, and thus the efforts to get the continent's economy moving again may amount to "pushing on a string."

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