The Governing Council of the European Central bank announced yesterday 25 bp cut on interest rates. The rate on deposit thus goes down to 3.25%, while those on main and marginal operations reach 3.40% and 3.65% respectively, with the measure having effect from the 23rd of October. The decision was taken after a careful analysis of the European economy which, according to the Frankfurt institution, appears to have slowed down while enjoying relatively low inflation.
In fact, while inflation stayed below the 2% target (1.7% as of September), the European landscape was characterized by the volatility of industrial production, a slow growth of services after a very active summer season, and a smaller-than-expected increase in consumption. It must be stated, however, that the European monetary authority does not foresee a recession, but a “soft landing” of the economy. Moreover, the ECB estimates that inflation will go up in December.
Investors and economists have rushed to give their opinion on the matter. Almost all economists interviewed by Reuters think that new rate cuts in December are certain, while Michael Field of Morningstar believes that an overheating of the economy because of this is unlikely. One a side note, financial markets keep a positive trend so far.
The decision by Christine Lagarde and her entourage shows their deep concerns about the state of the European economy, especially considering the unstable geopolitical environment. Although monetary policy alone cannot deal directly with the impact of these factors on the economy, it serves as a safety net for financial markets and small investors.
Author: Luis Cabezas