Rate Debate
March 10, 2009
With the ECB's prime lending rate currently at a record low of 1.5 percent, getting euros has never been so cheap. But a host of leading bankers have said the rate will have to fall even further if the ECB wants to fight the effects of global economic and financial crisis.
Indeed, one member of the ECB's executive board has broken a long-standing taboo and talking about the possibility of a 0 percent interest rate.
"If the economic situation worsens, the ECB is ready for further interest rate cuts -- even down to zero," Board Member Lorenzo Bini Smaghi told the German financial newspaper Boersen-Zeitung on Tuesday, March 10.
Smaghi stressed that such an option would only come in for consideration if the euro-zone economy was hit by deflation. But the mere fact that he mentioned it as a possibility signals how nervous Europe's leading bankers are these days about the prospects for economic recovery.
Broad consensus
Still, interest rates are unlikely to hit rock-bottom in the immediate future. The head of the ECB, Jean-Claude Trichet, has said in the past that a 0 percent interest rate is not on the agenda, and the head of Germany's national bank, Axel Weber, was quick to reject the option.
"I see 1 percent as the lower limit to which the primary refinancing rate can fall," Bundesbank President Weber said at a press conference on Tuesday.
But Weber, who is also an ECB director, seemed to indicate that he would support further, smaller cuts in the prime lending rate, as did his ECB colleague Juergen Stark.
"Of course, there's still certain room for monetary-policy maneuvering," Stark, who is responsible for the ECB's economic and monetary analysis, told Reuters news agency on Monday.
The US Federal Reserve and the Bank of Japan has effectively set their main rates at zero.
Creativity needed
But at the same time as the experts were suggesting further cuts in rates, they also cautioned against seeing such a strategy as a cure-all for the euro zone's economic woes.
"It won't be able to fundamentally solve the problems caused by the financial crisis," Stark said, adding that interest rates that were too low could actually worsen the euro zone's current difficulties.
The European Central Bank is also looking to explore other avenues to stimulate the bloc's economy.
"We will continue to consult about how -- above and beyond interest-rate cuts -- we can provide monetary-policy impulses," Weber said.
It's unclear what those alternative measures could be, but they will not include buying government bonds. The experts reject that idea, which has been used, for example, in England, as being contrary to the spirit of fair competition with the euro zone.