ECB cut shows weakness of euro economy
Japan has had a zero interest rate policy for some years. US rates are close to zero and will remain so for some time if the Federal Reserve is to be believed. UK rates are at 0.5%, and ECB rates have been at 0.5% for some time, and yesterday were taken down to a new record low of just 0.25%.
These levels may look positive for borrowers, but the economic reality is that these historically and artificially low levels reflect the economic difficulties policymakers have struggled with since 2007. In general, low interest rates reflect economic difficulties and rising rates reflect economic growth.
Although it would not suit heavily indebted borrowers here, rising interest rates should be welcomed as this would signify a sustained and substantial recovery in the global economy.
For a trading nation with a heavy dependence on exports, a solid recovery in the global economy would be much more beneficial than the persistence of current crisis-level interest rates.
However, Irish borrowers need not worry about ECB rate increases for the foreseeable future as the eurozone economy is still struggling in these very difficult economic circumstances.
Yesterday’s decision by the ECB to cut rates to 0.25% shows just how desperate policymakers are becoming. If rates at 0.5% are not sufficient to foster economic recovery, then what difference will rates at 0.25% make?
The hope is that this latest move will have a positive psychological impact and convince everybody that the ECB will continue to do whatever it takes to foster economic recovery.
The latest cut will create further problems for Irish banks already struggling to cope with a large loss-making tracker mortgage book.
The ECB cut reflects just how weak the eurozone economy still is and the total lack of inflation across the area. In Ireland, consumer prices increased by just 0.1% in the year to October, it was revealed yesterday.
The latest prognostication for the EU economy released by the European Commission this week does not exactly fill one with glee. Following a decline of 0.4% in GDP this year, the expectation is that growth will come in at a very modest 1.1% in 2014 and 1.7% in 2015. Such growth rates are well below what the region should be expecting to grow by if all resources are fully utilised, which is somewhere in the region of 2.5% to 3%.
The real problem is that the anticipated growth over the next couple of years will not be sufficient to make much of a dent in the hazardously high level of unemployment. At the moment the jobless rate in the euro area stands at 12.2% of the labour force, equivalent to 19.4m people.
The commission is forecasting an unemployment rate of 11.8% in 2015, equivalent to 19m people. These are very big numbers and highlight the malaise at the heart of economic policy making in the eurozone.
For this country, the commission is forecasting 1.7% growth next year, which is lower than the recent Department of Finance forecast of 2%, but such are the general uncertainties in 2014, precise economic forecasting is a total lottery, or at least more so than usual.
Ireland continues to see an improvement in consumer confidence, but how this translates into an actual increase in consumer spending is very difficult to predict.
From a consumer and retailer perspective it was great to get the budget out of the way early, and the arrival of full-year property tax bills in the midst of the biggest consumer spending period of the year was always going to be problematical, but the ham-fisted manner in which the issue is being addressed and the manner in which property tax has been brought into the national consciousness is not helpful.
