ECB cuts interest rates in bid to up inflation
05 Sep 2014
In an attempt to address low inflation, European Central Bank president Mario Draghi sprang a surprise on markets by slashing interest rates and announcing plans to buy asset-backed securities, in what is seen as a European version of quantitative easing (QE), Bloomberg reported.
However it remains uncertain whether QE alone would get inflation closer to the ECB's 2 per cent target. If it did it would not be because Draghi was pumping more euros into the economy; it would be because investors were persuaded that higher inflation was credible and under his control.
According to commentators, it was part mind game, part bluff, and the markets, so far, seemed optimistic about its chances of success.
After sliding for months, inflation expectations saw a 15-basis-point rise after Draghi's announcement and even though overall expectations continued to be low, the uptick came as a positive sign.
Expectations are a determining factor in wage contracts, investment decisions, and asset prices, which formed part of what made inflation a self-fulfilling prophecy.
Meanwhile, several eurozone countries struggle under high public debt that effectively caps spending that would otherwise help growth - new roads and schools, for example, AP reported.
Also the No 2 and No 3 economies, France and Italy, had been slow in reforming their economies to make it easier for companies to do business and hire.
Meanwhile, low inflation threatens to turn into an outright fall in prices - something that could hurt consumer spending as shoppers wait for prices to drop.
The economy is expected to grow slowly at best, after not expanding at all in the second quarter, when the crisis in Ukraine also weighed on confidence. Unemployment is proving hard to bring down - at 11.5 percent it is only marginally down from the peak 12 percent last summer.
The measures were likely to provide some immediate support, but beyond that, according to economists, the latest measures could not heal the economy.
According to Draghi, the ECB could only do that much and governments needed to make reforms and spend more where possible.
According to Marc Ostwald, market strategist at ADM Investor Services International, the truth of the matter was that no amount of ECB 'action' would change the grim outlook for the eurozone if politicians failed to confront the need for, and implementation of radical reforms.
