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ECB Unlikely To Follow The Fed’s Lead

  • December 23rd, 2008
  • Posted by Daniel Challis

The European Central Bank Executive Board Member Lorenzo Bini Smaghi (pictured) said on Monday (22.12.08) that the ECB was unlikely to do the same as the Federal Reserve (USA) by cutting interest rates to zero.

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Mr Bini Smaghi said European financial markets were beginning to slowly stabilise and wouldn’t require such a drastic cut.

Both the ECB and the “Fed” have cut rates significantly in the last few months to counteract a recession arising from the global financial crisis.

The ECB cuts its interest rates by 175 basis points to 2.5% around two weeks ago (see EUAustralia, “European Central Bank Cuts Rates”, 11.12.08).

The US Central Bank however has been more aggressive; the Fed cut its benchmark interest rates to an extraordinary 0 to 0.25% low just last week.

But Mr Bini Smaghi said the lending situation in Europe was very different to the US and warned about the possible drawbacks of a too-lenient monetary policy.

“We must not forget that the current crisis was caused by a period of interest rates taken to a very low level for too long,” he told the Rome daily Il Messagero.

Some economists have been predicting the ECB will cut its rates by 50 basis points in mid-January, bringing the key policy rate down to 2%.

Reference:

Luca Di Leo, “European Central Bank to avoid zero interest rates”, The Australian online, http://www.theaustralian.news.com.au/business/story/0,,24832697-36418,00.html, (22.12.08).

Reuters UK, “ECB situation different to Fed on rates – B.Smaghi”, http://uk.reuters.com/article/marketsNewsUS/idUKLL33085320081221, (21.12.08).

Picture: ECB Executive Board Member Lorenzo Bini Smaghi

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