Thu November 7, 2013
Super Mario Cut Interest Rates Today And That's Huge News
Twitter's IPO is Thursday's sexy business story.
But the really big business news is that "the European Central Bank startled investors Thursday with a surprise cut in its benchmark interest rate." As The Associated Press adds, "The bank lowered the benchmark refinancing rate to a record low 0.25 percent from 0.5 percent."
Here's why that's important:
"This was the European Central Bank," writes Neil Irwin at The Washington Post's Wonk Blog. "The hard-line, inflation-phobic, Germany-based institution that sets monetary policy for the 17-nation euro zone and has been reluctant to do anything that might risk even the eensiest bit of inflation. ... Analysts had assigned only perhaps a one-in-four or so chance it would make such a move, and thought it more likely the ECB would drag its feet and wait for more data to prove that Europe is falling into a Japan-style deflation trap."
"The unexpected nature of the rate cut," says Bloomberg News, underscores ECB President Mario Draghi's status "as a central banker prepared to tackle head on" the challenges facing the euro zone.
The greatest challenge in the zone now could be deflation, many analysts say.
"While lower prices might seem like a good thing for consumers, in fact deflation is considered even more dangerous than runaway inflation," warns The New York Times. That's because:
"When prices fall, consumers and businesses delay purchases because they expect goods to become even cheaper. Corporate profits decline, and companies are forced to pay their workers less. A spiral begins that is difficult to arrest.
"Deflation could be particularly destructive in Europe, where governments, banks and private households are still struggling with excess debt. When companies and individuals earn less, they have trouble repaying their debts, which remain the same."
So if "Super Mario" (as the Italian banker is called by many in the European media) is moving to head off a potential deflation spiral, that could boost Europe's still sluggish economies — which is good news for the rest of the world if that means Europe's appetite for imports will perk up.
The bad news, as news outlets note, is that the ECB doesn't have much more room to maneuver on interest rates. The next step lower than 0.25 percent is zero. What's more, the AP says:
"The ECB theoretically could also engage in so-called quantitative easing — using newly created money to buy bonds in the open market. That tool has been deployed by the U.S. Federal Reserve, Bank of England and Bank of Japan. But analysts say the ECB faces serious technical and political obstacles to doing that because it is a single central bank for 17 countries. That raises the question of how to apportion the purchases among 17 different bond markets."
But for now, financial market's are rallying in part on the news that Super Mario is on the case. And that's big news.