What’s Going On Here?The new European Central Bank (ECB) president, Christine Lagarde, made her policy meeting debut on Thursday, and – cue the entrance anthem – the crowd went mild. What Does This Mean?Back in September, the ECB both cut interest rates to a record low of -0.5% and resumed a program of “quantitative easing”. And it stuck to those guns on Thursday, though it did lower its forecast for eurozone economic growth slightly. The bank, it seems, won’t even consider raising rates or halting European bond purchases until inflation – the rate at which the prices of goods and services increase – hits its target. They're hoping it might encourage spending while prices are lower and, ultimately, boost growth.
With no big surprises from the announcement, the focus now shifts to the bank’s first “strategy review” in 16 years. The review, due in January, will look at whether the inflation target – which hasn’t been met in years – needs adjusting. It’ll also tackle broader issues like inequality, climate change, and technological developments. Why Should I Care?The bigger picture: Contraction contagion.
With European manufacturing in a slump as the US-China trade war and Brexit take their toll, it’s no wonder the ECB wants to revive the region’s economy. But new data on Thursday – which showed industrial production in the eurozone contracted again in October – suggests there’s still a long road ahead. The ECB might be worried that the longer the slump continues, the more likely it is to spread to other sectors in the bloc.
Zooming out: Stuck in limbo.
The ECB certainly doesn’t have the lowest rates in town: Switzerland’s central bank kept its interest rate at -0.75% when it met on Thursday. But while the ECB is worried about inflation and weak growth, the Swiss central bank is more worried about a strong currency that’s hurting exporters. A lower interest rate might discourage investors from keeping their money in Swiss francs and should, in theory, keep the currency from strengthening further. | 