ECB interest rate: the fireworks are yet to come

The cabinet is furious with Mario Draghi, the president of the European Central Bank (ECB), because he has cut interest rates again. On the other hand, the ECB would like to see the Netherlands give the economy a boost through tax measures. Who's right?

The financial world will miss Draghi if he resigns on Thursday 31 October. Within the limits of his function, Draghi did a good job of keeping the eurozone economy going and preparing the financial markets for his sometimes extreme measures. On Thursday 12 September he took care (just before his departure) 1 times for fireworks. He pushed the official interest rate down even further: from -0,4% to -0,5%. In addition, the bank will buy €20 billion worth of government bonds every month.

These measures are necessary because inflation in the eurozone is far too low. The ECB aims for a level of almost 2%. However, the inflation forecast for the current year was reduced from 1,3% to 1,2%. The adjustment for 2020 is completely painful: from 1,4% to 1,0%. Inflation is particularly low in southern European countries. In Italy, Spain and Portugal, inflation in July was at or even below 0,5%. Here in the Netherlands it was 2,5%.

Tax reduction
It is impossible for the ECB to get inflation to one level everywhere. The differences between European countries are simply too great for that. Christine Lagarde, who will succeed Draghi at the end of next month, has said that low-debt countries should start taking fiscal measures to boost the economy; instead of stepping on the brakes by dutifully following European fiscal rules. In the coming years it will become clear whether Lagarde succeeds in getting Germany, the Netherlands and other Northern European countries moving.

During the chairman's speech, the euro fell about 1% against the dollar, marking the lowest level since the beginning of 2017. Immediately afterwards, however, the currency bounced back. The financial parties apparently counted on more fireworks when Draghi left. There is a good chance that the euro will gain some ground in the near future. It remains to be seen whether Lagarde will dare to open the box of tricks shortly after taking office.

Across the ocean, Jerome Powell, the chairman of the Federal Reserve (Fed), is under great pressure from US President Donald Trump. He wants to lower interest rates further. And at an interest rate of 2,25%, this can be done in larger increments than Draghi's 10 basis points. The real fireworks are yet to come.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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