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European Central Bank Cuts Main Rate European Central Bank Cuts Main Rate
(35 minutes later)
FRANKFURT — In a surprise, the European Central Bank cut its benchmark interest rate to a record low Thursday, moving more quickly than expected to stimulate the euro zone economy in the face of falling inflation.FRANKFURT — In a surprise, the European Central Bank cut its benchmark interest rate to a record low Thursday, moving more quickly than expected to stimulate the euro zone economy in the face of falling inflation.
The E.C.B. cut its main rate to 0.25 percent from 0.5 percent, which was already a record low.The E.C.B. cut its main rate to 0.25 percent from 0.5 percent, which was already a record low.
The central bank and its president, Mario Draghi, were apparently reacting to a sudden drop in euro zone inflation, which fell to an annual rate of 0.7 percent in October, well below the E.C.B.'s official target of about 2 percent. The fall raised the specter of deflation — a sustained fall in prices that can destroy the profits of companies and the jobs they provide. The central bank and its president, Mario Draghi, were reacting to a sudden drop in euro zone inflation, which fell to an annual rate of 0.7 percent in October, well below the E.C.B.'s official target of about 2 percent. The fall raised the specter of deflation — a sustained fall in prices that can destroy the profits of companies and the jobs they provide.
Many economists and political leaders will applaud the decision, which is likely to weaken the euro against the dollar and help European exporters. European stocks rose on the news, with exchanges in Paris and Frankfurt up more than 1 percent, while already the euro fell more than 1 percent against the dollar. A cheaper euro makes European products less expensive abroad.Many economists and political leaders will applaud the decision, which is likely to weaken the euro against the dollar and help European exporters. European stocks rose on the news, with exchanges in Paris and Frankfurt up more than 1 percent, while already the euro fell more than 1 percent against the dollar. A cheaper euro makes European products less expensive abroad.
But the decision also carries some risks. It could be interpreted to mean the E.C.B. is more concerned about deflation and slow euro zone growth than analysts expected, an interpretation that could undermine confidence. And the decision to cut to 0.25 percent leaves the E.C.B. with little room to maneuver if economic conditions worsen.But the decision also carries some risks. It could be interpreted to mean the E.C.B. is more concerned about deflation and slow euro zone growth than analysts expected, an interpretation that could undermine confidence. And the decision to cut to 0.25 percent leaves the E.C.B. with little room to maneuver if economic conditions worsen.
The decision may also be received with dismay in Germany, where concern about excessive inflation has deep roots. The E.C.B. cannot risk alienating Germany, which has the largest economy in the euro zone.The decision may also be received with dismay in Germany, where concern about excessive inflation has deep roots. The E.C.B. cannot risk alienating Germany, which has the largest economy in the euro zone.
“Deflationary risks and the stronger euro seem to have motivated the E.C.B.'s move,” Carsten Brzeski, an analyst at ING Bank, said in a note to clients. “It is obvious that the E.C.B. under President Draghi has become much more proactive than under any of his predecessors.”“Deflationary risks and the stronger euro seem to have motivated the E.C.B.'s move,” Carsten Brzeski, an analyst at ING Bank, said in a note to clients. “It is obvious that the E.C.B. under President Draghi has become much more proactive than under any of his predecessors.”
The E.C.B.'s prime mandate is to defend price stability, which also means intervening if inflation is too low. But most analysts expected the E.C.B. to wait until December to act, once there was more economic data available.The E.C.B.'s prime mandate is to defend price stability, which also means intervening if inflation is too low. But most analysts expected the E.C.B. to wait until December to act, once there was more economic data available.
At a news conference, Mr. Draghi said interest rates would stay low for an extended period of time. The central bank will also keep supplying banks with cheap loans through mid-2015, he said, but he did not announce a new round of long-term, three-year loans. The euro zone is not in a period of Japan-style deflation, he said. On the contrary, price declines in some countries are welcome because they makes them more competitive on international markets, he said.
“I don’t think it is similar to Japan,” Mr. Draghi said of the current situation in Europe.
Some economists have argued that falling inflation, coming after five years of recession or very slow growth, means that the euro zone faces an acute risk of deflation. While lower prices might seem like a good thing for consumers, in fact deflation is considered even more dangerous than runaway inflation.Some economists have argued that falling inflation, coming after five years of recession or very slow growth, means that the euro zone faces an acute risk of deflation. While lower prices might seem like a good thing for consumers, in fact deflation is considered even more dangerous than runaway inflation.
When prices fall, consumers and businesses delay purchases because they expect goods to become even cheaper. Corporate profits decline, and companies are forced to pay their workers less. A spiral begins that is difficult to arrest.When prices fall, consumers and businesses delay purchases because they expect goods to become even cheaper. Corporate profits decline, and companies are forced to pay their workers less. A spiral begins that is difficult to arrest.
Deflation could be particularly destructive in Europe, where governments, banks and private households are still struggling with excess debt. When companies and individuals earn less, they have trouble repaying their debts, which remain the same.Deflation could be particularly destructive in Europe, where governments, banks and private households are still struggling with excess debt. When companies and individuals earn less, they have trouble repaying their debts, which remain the same.
It is unclear, though, what effect the rate cut will have, given that market interest rates are already effectively less than zero. At best, the cut signals that the E.C.B. will remain true to its mission of ensuring stable prices.It is unclear, though, what effect the rate cut will have, given that market interest rates are already effectively less than zero. At best, the cut signals that the E.C.B. will remain true to its mission of ensuring stable prices.
The E.C.B. Governing Council probably also discussed other options Thursday as well, such as another round of very cheap three-year loans to commercial banks, perhaps with strings attached to ensure that the banks lend the money on to businesses and consumers.
The view in Germany and among some economists is that there is no threat of deflation. This group sees slowing inflation merely as a sign that wages are falling in countries like Spain and Greece, where labor costs had become too high for companies to compete in the international marketplace.The view in Germany and among some economists is that there is no threat of deflation. This group sees slowing inflation merely as a sign that wages are falling in countries like Spain and Greece, where labor costs had become too high for companies to compete in the international marketplace.
It is likely that Jens Weidmann, president of the German central bank, the Bundesbank, argued vehemently against a rate cut.It is likely that Jens Weidmann, president of the German central bank, the Bundesbank, argued vehemently against a rate cut.
Although the euro zone emerged from recession earlier this year, recent economic indicators have sent conflicting signals about the strength of the recovery. Few economists expect a strong rebound, but some have been more pessimistic than others, warning of long-term stagnation if the E.C.B. does not do more to stimulate lending and growth.Although the euro zone emerged from recession earlier this year, recent economic indicators have sent conflicting signals about the strength of the recovery. Few economists expect a strong rebound, but some have been more pessimistic than others, warning of long-term stagnation if the E.C.B. does not do more to stimulate lending and growth.
“There has been a big hoo-ha about this very modest return to growth,” said Simon Tilford, deputy director of the Center for European Reform in London. “Clearly the risks are mounting.”“There has been a big hoo-ha about this very modest return to growth,” said Simon Tilford, deputy director of the Center for European Reform in London. “Clearly the risks are mounting.”
In contrast to the E.C.B.'s move, Britain’s central bank kept its benchmark interest rate unchanged on Thursday at a record low of 0.5 percent amid signs that the country’s economic recovery was gaining speed and consumer confidence improved.In contrast to the E.C.B.'s move, Britain’s central bank kept its benchmark interest rate unchanged on Thursday at a record low of 0.5 percent amid signs that the country’s economic recovery was gaining speed and consumer confidence improved.
In the United States, the government said the economy grew at an annual rate of 2.8 percent in the third quarter, significantly better than economists had expected and the fastest pace this year.