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ECB interest rate cut is a surprise

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Azad Zangana (pictured), European Economist, Schroders, comments on the ECB’s surprise cut in interest rates…

The European Central Bank has surprised the market by cutting the main interest rate from 0.50% to 0.25%. The cut appears to be in reaction to the early estimate of annual inflation for October, which was much lower than expected at 0.7%.

While leading indicators suggest the Eurozone economy is recovering, the ECB is clearly concerned about the recent strength of the Euro, and the way it has lowered import prices and local inflation.

The problem of low inflation and higher loan interest rates to households and business is most acute in the crisis hit peripheral Eurozone member states. However, we doubt the latest rate cut will have any impact in lower loan interest rates in these countries, as those banks do not hold adequate capital to lend, regardless of the interest rate.

The cut in interest rates is a clear signal to the market that the ECB would like a weaker Euro in order to better reflect the state of the overall Eurozone economy. However, with the current account surplus at a record high, you may see the Eurozone’s export competitors crying foul play.

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