Although the European Central Bank (ECB) announced a welcome—and perhaps overdue—rate cut today, analysts aren’t happy. Not happy at all.
In a perfect world, lowering interest rates would make borrowing easier for small businesses and individuals, which form the backbone of a healthy economy. Unfortunately, the euro zone economy no longer works like that; it’s contracting, and though interest rates have fallen, a lack of trust in the banking system translates into higher borrowing costs for the little guy. (Read more about that here.)
Analysts hoped against all hope that the ECB would do something more to kick-start the struggling euro economy. But this was just a pipe dream. That’s why the euro is selling off, explains Citi head of FX Strategy Steven Englander:
We got a balance view of inflation risk, a non-unanimous rate cut, a declaration once-again that the ECB is not in the business of monetization, and an extremely vague comment on SMEs [small- and medium-sized enterprizes] and hand-off to other institutions.
Short-term rates are extremely low already in the euro zone, so it is hard to believe that a negative depo rate or a further cut will resolve the euro zone’s economic problem. The ECB itself has identified the problem as the transmission mechanism to the private sector. The disappointment today is that the announced measures will do little to improve those conditions.
Andrea Cicione, of Lombard Street Research, wrote in a note ahead of the decision:
The ECB is likely to cut rates by 25bp today. That would be largely ineffective. Measures to ease credit conditions for SMEs would be more useful, and cause a stronger market reaction.
And investors and bloggers on Twitter couldn’t agree more.
All draghi’s good news seems to be second derivative – reduction in the rate of change (not the sign before it +/-)
— Lorcan Roche Kelly (@LorcanRK) May 2, 2013
Puny 25 basis point cut from the ECB means the eurodepression will keep on keeping on.
— Matt Yglesias (@mattyglesias) May 2, 2013