Could interest rates in the Euro area go any lower?
Last Thursday, the European Central Bank (ECB) cut interest by 0.25 per cent to 1.25 per cent, falling short of analysts’ expectations of another 0.5 per cent rate cut. Business Today spoke to four economic analysts – Labour candidate for EP elections and economist Edward Scicluna, veteran banker and University professor John A Consiglio, veteran economist Karm Farrugia, and economist Lawrence Zammit – about the ECB’s latest decision, the issue of non-standard measures and whether Maltese banks should cut their interest rates after the latest ECB cut, among other things. Report by CHARLOT ZAHRA
Edward Scicluna : “Too little too late”
What is your opinion about the ECB’s decision to cut interest rates at a historic low of 1.25 per cent?
Too little too late. The ECB does what some other Central Banks would have done with a bolder cut a month earlier. The overly conservative attitude of the ECB is now well established.
What, do you think, led the ECB to exercise caution with cutting the interest rate this time around despite the worsening of the economic crisis in the euro area, especially the inflation figures?
The ECB is more reluctant than the Federal Reserve to start using what it refers to as “non-standard” measures to support the Euro zone economy.
The tiny and sparse cuts in the interest rates prove that the ECB wanted to take its time before reaching this unorthodox stage, which every central banker dreads.
Resorting to quantitative easing and direct printing of money is not a light decision to take. It is still uncharted waters.
ECB Governor Jean-Claude Trichet reiterated his warning of using “non-standard” measures to support the Euro zone economy, saying that the ECB would be discussing the matter next month. Do think that the time is now ripe for non-standard economic measures or not? Why?
Quantitative easing is the term we use which a Central Bank may use in such an eventuality. It is similar to a tourniquet used in first aid; it may stop the haemorrhage but creates dangerous side effects.
The printing of money sends shivers down the spine of any central banker. Can you imagine the European Central Bank getting to that stage in a country like Germany – where hyperinflation is likened to a volcano exploding in the middle of the town? Memories are hard to be forgotten.
On the other hand, the downward risks are still there in spite of seeming observations of traces of an economic uplift on the horizon. Economic activity and asset prices are falling at a lesser rate.
But one still needs to use all the monetary and fiscal instruments at one’s disposal to stop this dangerous beast. The 1930s devastation happened only 80 years ago.
The stages being reached are still very similar. That’s why it is so scary. The G20 meeting has to be seen in this perspective.
Last month, Maltese banks did not pass on the full interest rate cut to clients, claiming that they wanted to protect depositors. In view of the current crisis facing the Maltese economy, do you agree with the banks’ approach? Why?
The fall in the central interest rates have stopped being effective because the banks are no longer responding in sympathy. Today’s banks are upping their rates rather than lowering them.
The reason is simple to understand. Interest rates include a risk element. That risk element is increasing and the cautious and correct banks want to reflect it in their lending rates.
And that is why soon the Central Banks have to do what the Japanese did in their decade long recession – quantitative easing.
In your view, should they now pass the full interest rate cut to their consumers, especially since the rate cut is smaller?
Governments may use cajoling, suasion and similar methods to get banks to respond to ECB rate changes. But there is a limit to what they can do.
Karm Farrugia : “I wonder how our Governor voted in the ECB session”
What, do you think, led the ECB to exercise caution with cutting the interest rate this time around despite the worsening of the economic crisis in the euro area, especially the inflation figures?
The cut should have been at least 0.5 per cent, not 0.25 per cent. ‘Caution’ is forever admirable. ‘Excessive caution’ – typical of most central bankers – however, must meet any economist’s disapproval in today’s depressing economic circumstances worldwide, not least in the single currency market of which we form part.
I wonder how our bank’s Central Bank Governor voted in a session which, I am sure, couldn’t have enjoyed unanimity or, possibly, even consensuality.
The ECB is betraying a lack of sensitivity and understanding of the world’s real economic woes, remaining obsessed with inflationary fears which, even if they did materialise – probably not as a result of low borrowing rates – they would more easily be tackled than up till now.
To me the ECB exemplifies ‘old Europe’, forgetful that it produced Keynesian economics which the Americans embraced and actuated earlier and more fervently than the Europeans themselves whose economies were ‘saved’ only by the need to rearm against Nazi hegemony.
ECB Governor Jean-Claude Trichet reiterated his warning of using “non-standard” measures to support the Euro zone economy, saying that the ECB would be discussing the matter next month. Do think that the time is now ripe for non-standard economic measures or not? Why?
Trichet did not ‘warn’ but he ‘ advised ‘ about ‘non-standard’ measures being considered. The earlier these measures are introduced the better for everyone, euro zone in particular.
In view of the latest economic data for the euro zone, when do you think that the euro zone will start coming out of the economic recession? Will it be a protracted recession or a short one?
The ECB’s ‘feet-dragging’ policy is likely to prolong the zone’s recession, with recovery commencing later than in non-euro zone countries.
Last month, Maltese banks did not pass on the full interest rate cut to clients, claiming that they wanted to protect depositors. In view of the current crisis facing the Maltese economy, do you agree with the banks’ approach or not? Why?
Maltese banks have been doing what they like with regard to their exorbitant charges for a whole decade now. In today’s economic climate I would have expected at least one of them to announce a narrowing of its operating margins/turns.
I also expected the MFSA to revive the old-fashioned ‘suasion’ policy which worked so well when the banks were differentiated from other financial institutions and regulated by the Central Bank.
This may well happen as a result of the decision taken by the G20 summit conference.
John A Consiglio: “There must be a level below which the market will choose to distance itself from the ECB’s decisions”
Let’s be clear about this whole business of the ECB reducing, reducing, reducing its central interest rates. Surely there must be a level below which the market will choose to distance itself from what the ECB is doing or saying.
Surely there must be some low limit where bank customers will react to banks who automatically dance to the ECB’s tune by saying “I’d rather keep my funds at home, and using them in ways other than making them available to the banking system”.
Surely there must be some low levels where some banks think very independently and much more concerned with keeping a strong deposit base to be able to carry on doing what they always did successfully, that is, act as decently-equipped intermediators and so satisfy their borrowing customers’ needs for funds.
So no, I do not agree with the ECB’s decision to cut interest rates by another half percentage point, and on top of that even say they might go down even lower.
In the wake of even bigger plans to fund poorly performing economies – as announced at the end of the G20 meeting – my belief is that the ECB should have waited to first see how fast the G20 nations will be moving to implement the decisions taken at the London meeting.
Because, as I said in past weeks, this current situation is not solely the fault of bankers and banks. Several do of course have a lot to answer for, and on that score I am four square with Sarkozy in his arguing for ever better and tighter regulatory practices and structures.
But then, beyond the money economy, there also happens to exist a real economy. And the measures to stimulate that again to pre-recession levels certainly do not lie solely in the world of finance, let alone central bankers.
In a certain sense the ECB has monetary policy powers that – for want of a better description – can be described as both the modern and the old fashioned ones.
If, for example, specific directives on quality and quantity of permitted lendings to specific sectors are pushed by either the ECB or even national central banks, then sagging production and/or demand in some economic sectors in some countries could perhaps be revitalised.
As to more use of open market operations these require very careful study according to individual separate country situations, particularly in the light of now very worrying budget deficit and public debt situations Listening to Commissioner Almunia speak these days is sounding similar to hearing that young boy on the beach who had over time managed to build quite a few lovely castles, but these have now all been blown back to sand, and he must start all over again.
I repeat what I said in recent weeks....by the tail end of this summer, or the last months of this year, we will probably all be talking a very much less panicky sort of language.
Maltese banks are operating in a financial market that is very different to those elsewhere in the EU. For them, the transmission mechanism of ECB-CBM-Maltese money and capital markets is very different to that in other EU countries.
They are flush with funds, making good profits, excellently managed, in a unique type of market structure, and so they take decisions – such as that of passing, or not passing, on to customers ECB decided interest cuts – in a very different context to what is done in the EU.
The contention that this time round they should fully pass on to their customers the interest rate cut simply because this time it is a smaller cut (0.25 per cent) must be judged within the context of both the particular situation of each different bank, and much more so, in my humble opinion, in the context of what I said above.
The size of the ECB cut still does not, in my book, carry much of an argument for automatic adoption by all banks in Malta.
Lawrence Zammit: The ECB needs to adopt “all the measures possible” to help the Euro zone economies move out of the recession
What is your opinion about the ECB’s decision to cut interest rates at a historic low of 1.25 per cent?
To my mind the ECB decision to reduce interest rates would indicate that expectations for inflation remain very low, while the main Euro zone economies require to be stimulated further to get out of the recession.
Do you agree with the ECB’s decision to cut interest rates by half a percentage point as predicted by most financial analysts predicted? Why?
I do not have the economic data that the ECB would have so it is difficult to pass judgment on the decision of the ECB to cut interest rates further.
What do you think led the ECB to exercise caution with cutting the interest rate this time round despite the worsening of the economic crisis in the euro area, especially the inflation figures?
The ECB decided to reduce interest rates further because of and not in spite of the worsening economic crisis. The inflation figures cannot be described having worsened because the rate of inflation is on its way down.
ECB Governor Jean-Claude Trichet reiterated his warning of using “non-standard” measures to support the Euro zone economy, saying that the ECB would be discussing the matter next month. Do think that the time is now ripe for non-standard economic measures or not? Why?
The ECB needs to adopt all the measures possible to help the Euro zone economies move out of the recession. The Euro zone economies need to be very careful about the fiscal policy they adopt. Thus the role of the ECB becomes even more critical.
In view of the latest economic data for the euro zone, when do you think that the euro zone will start coming out of the economic recession? Will it be a protracted recession or a short one?
I do not believe that it is possible to make any meaningful predictions on this issue. Some economic analysts are claiming that the situation will stabilise this year. If this does actually happen, then we can expect to start coming out of the recession in 2010.
Last month, Maltese banks did not pass on the full interest rate cut to clients, claiming that they wanted to protect depositors. In view of the current crisis facing the Maltese economy, do you agree with the banks’ approach or not? Why?
I have already stated publicly that I disagree with the stand taken by the Maltese banks. However, I also appreciate that they are running their business and they know what is best for their business.
