Economic Activity in the EZ Remains Weak

For the second time in 15 months, Mario Draghi has shown his willingness to do “whatever it takes” to foster a recovery in the eurozone. Echoing the spirit that led him to unveil his unlimited bond-buying programme last summer, the European Central Bank president has now cut interest rates to 0.25 per cent, a record low. Investors who thought the ECB would need a longer period of reflection before acting were caught on the hop. Stocks jumped and the euro fell to a seven-week low.

But the further monetary loosening is hardly premature. For all the talk of recovery in recent months, economic activity in the eurozone has been weak and unemployment, particularly in crisis-hit countries, stubbornly high. If anything, the ECB should have acted sooner. However, German political opposition to a new monetary stimulus has been formidable. Jens Weidmann, president of the Bundesbank, voted against Thursday’s rate cut.

Mr Draghi was right to face down the Bundesbank on this occasion. A rate cut is consistent with the ECB’s mandate, which states that the central bank should keep inflation at 2 per cent or marginally below. In October prices rose by a mere 0.7 per cent. The eurozone has entered a period of disinflation. This is worrying. Consumers and businesses have fewer reasons to spend their cash today if they know that prices tomorrow will not be much higher. Some inflation is also a relatively costless way of shrinking public debts.

Financial Times

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