The eurozone’s economic health is under the microscope again this week after the European Central Bank decided to cut its guiding interest rate from 0.75% to 0.5%. Whilst the move was expected, it is the first new reduction in 10 months, and it signals that no one expects the continent’s economy to sort itself out any time soon.
Simultaneously, data showed that manufacturing across the eurozone shrank in April, and not even the Teutonic powerhouse was immune to the effects. It’s manufacturing sector contracted for the second consecutive month. The ECB president Mario Draghi said: ‘Weak economic sentiment has extended into the spring of this year. Inflation expectations in the euro area continue to be firmly anchored. The cut in interest rates should contribute to support a recovery later in the year.’
But reducing the interest rates to 0.5% is exactly what the Bank of England did in the UK, and yet we’re still not exactly reprising the Roaring Twenties, are we? Still Draghi justified it by saying that the ECB’s main objective was to stabilise the European market in the near term. There has even been the suggestion that if things do not improve later in the year, the ECB could impose negative interest rates so that it becomes more profitable for banks to lend than to withhold money.
Speaking to journalists, Draghi did not rule out the possibility of this happening. He said that the ECB’s policy committee had ‘an open mind’ about the idea. Of course, currency markets were not at all happy with that: the euro hit its lowest point all day within minutes of Draghi’s comments, falling below $1.31.
So, another set of bad economic data, another bit of frenzied lever pulling by policy makers, and another convulsion in the markets. Nothing new there then.