- New interest rate reduction in response to economic troubles
- Interest rate reductions have not helped: economic growth remains stubbornly low
The European Central Bank (ECB) reduced interest rates again today. “This is a stronger response from the ECB to the economic troubles in the Eurozone,” according to Heiner Herkenhoff, Chief Executive of the Association of German Banks. He went on to say that the inflation rate in September, which sank to 1.7 percent, gave them the leeway they needed to further reduce interest rates.
“However, the ECB would do well to ensure that they do not switch to ‘autopilot’ for future interest rate policy decisions. The ECB must make it clear that there can be no expectation that key interest rates will continue to be lowered at the meetings to come. This is particularly true right now, because statistical effects alone will ensure that the rate of inflation will rise again over the next few months.”
The Association of German Banks predicts inflation rates of up to 2.5 percent in November and December for the whole of the Euro area. According to Herkenhoff, in light of the recent inflation shock, the ECB must remain very cautious when dealing with the renewed rise in inflation, which they have also predicted. He went on to say that an expectation of continued interest rate reductions in upcoming meetings would not be in line with the reality of the situation.
The Chief Executive of the Association of German Banks warned against the European states, particularly Germany, basing their economic policy on illusions: “Reductions in key interest rates will not fix economic growth, which remains low due to structural issues. Instead, Germany in particular requires decisive economic policy signals,” said Herkenhoff, adding that there is a need for comprehensive, overall improvements for companies in terms of both investment and Germany as a business location. "Promoting individual sectors, on the other hand, will not help,” according to Herkenhoff.
“What we really need is much faster planning and approval processes, a reduction in regulatory requirements which create unnecessary hurdles for businesses and generalised support for investment, for example via better rules for depreciations or an internationally competitive corporate tax.”
