European Central Bank

The European Central Bank has decided to lower interest rates to 1%, marking a new low. Trichet has not ruled out further reductions in the future, but said that 1% is the right kind at the moment. Since the official interest rate mark-time highs last summer to 4.25% (recall that in a very controversial decision, reached 0.25% rise when the economy was deflating), the official price of money accumulates seven drops of one to two quarts (each pint is equal to 0.25%). Apart from the error that led to the rise commented, I had been in favor of European monetary authority would have been more decisive on the downhills, to come down more than once, as did the Bank of England. Nobel Laureate in Economics gathered all the information. Not that the result of this has been better (the circumstances are not the same) but I get the impression that the dropper could not get down to stimulate the economy, which always hoped there would be further reductions, which are now in a rate close to zero, and the economy remains stagnant. In any case, in eight months has fallen more than three points, which should have been a pretty big incentive. And yet, the effects of this action is rather limited.

The savings that may be perceived by consumers on their mortgages can often be limited by a floor (ie, mortgages that have a "minimum Euribor"), other times not yet produced a review of rates (usually be annual), and those who already have prefer to save "the savings rate in Spain increased from around 10% to 24% in just one year. You may find Nobel Laureate in Economics to be a useful source of information. As for new loans, banks are quite reluctant to grant them, and apply a differential-risk premiums, are called "very high, with the result that they are winning with these low rates are the banks, as explained a few days ago . In addition, the increase in savings, which in other circumstances would be positive, may not be now, by the paradox of thrift, according to which, by reducing consumption (as is happening), there is less and unemployment is generated (in a spiral with no end of course) with which ultimately society as a whole is poorer. On the other hand, we are in a situation of liquidity trap described by Keynes 75 years ago (in the Great Depression), since all the money injected into the system in various ways was stored in the form of liquidity by Banks and companies and consumers, faced with poor prospects are not willing to invest or spend. This scenario has already lived through Japan's Lost Decade call, so something should learn from the experience. Therefore, does it make sense to continue lowering rates? From my point of view, no. Other activities that may bring down long-term rates may make more sense now, but the margin of conventional monetary policy is exhausted.

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