ECB Rate Cut Is Weapon of Choice as Draghi Threatens Action
Comment of the Day

June 18 2019

Commentary by Eoin Treacy

ECB Rate Cut Is Weapon of Choice as Draghi Threatens Action

This article by Paul Gordon and Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

ECB President Mario Draghi appeared to set a low bar for action on Tuesday when he said additional stimulus will be needed “in the absence of any improvement” to the outlook for growth and inflation. He specifically cited rate reductions as an option, sending the euro lower and prompting money markets to price in a 10 basis-point cut by December.

Investors subsequently brought forward their expectations to September after Bloomberg’s report. Commerzbank now predicts such a policy step in July.

“Draghi is going to finish his tenure with a cut,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics. “The door is now open and I don’t see how they can not walk through it.”

Eoin Treacy's view

There is a first principles question that governments have no appetite to grasp. “How do you recover from a debt bust?” We know what the answers are. You default, recapitalise and try not to make the same mistake again. The problem in Europe is the creditors are Northern European pension funds and the debtors were peripheral banks, who have had much of their debt absorbed by their respective governments. The prospect of debt forgiveness, therefore, has massive issues of moral hazard and was untenable politically, even though it remains necessary if the debt mountains are to be dealt with and growth prospects renewed.

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