Sound bites: ECB rate cut just the start of a new policy initiative

The ECB rate cut is no surprise as it was well flagged by Draghi at last month’s meeting. Is it enough? No. The marginal effect of the cut is very limited, but at least it should have some symbolic rallying effect on economic confidence. The ECB cannot afford rest on its laurels and stop with a simple rate cut. The ECB rate cut should just be the start of a new policy initiative. There is a lot more work to be done. Entrenched Eurozone recession and the fast falling inflation rate underline that ECB monetary policy is still far too tight. To avoid falling into the same deflation rut that Japan has been stuck in for ages, the ECB needs to work fast and it needs to pull out all the stops. The ECB must open up all its monetary throttle to get any hopes of recovery going again in the near term. It needs to take a big leaf out of the US Fed’s and BOJ’s policy books and flood the Eurozone with a surfeit of liquidity to refloat the Eurozone’s sinking economy.

The ECB needs to resort to any sort of new measures to rescue the Eurozone economy – conventional and unconventional. While it may be anathema to the Bundesbank, the ECB needs to open up the stop-cocks to quantitative easing to inject much more monetary muscle into the financial system and economy. The ECB needs to ensure the liquidity that has flooded into the banking system reaches borrowers in the shape of much easier credit. The Eurozone is suffering a haemorrhage of potential stimulus as domestic credit continues to contract at a fast pace. This needs to be quickly corrected.

Much easier ECB monetary policy needs to be matched by a u-turn in EU government fiscal policy, away from austerity towards growth promotion. The Eurozone needs 4-speed policy stimulus, which requires easy rates, easy money, easy budgets and an easy currency. Perhaps a big factor in the recovery plan should be a tacit abandonment of the strong euro. The ECB can afford to talk the currency lower to allow a boost to Eurozone export competitiveness. Germany would not be the only beneficiary as the troubled Eurozone economies could get a vital lift to their struggling export industries. There is no inflation risk to worry about. If there is a risk, it is that Eurozone inflation could become too low, if deflation forces set in. The ECB needs to throw caution to the wind and follow the same path as the US, Japan and the UK with a much more vital monetary lift to economic recovery prospects.