The ECB Must Take Action on Rates
The European Central Bank made a grave mistake when it left interest rates unchanged at 4.75% on Apr. 11. The euro zone economy badly needs a rate cut to revitalize growth, which is being sapped by the slowdown in the U.S., Japan, Asia, and Latin America. The 18 members of the ECB's governing council don't need to look far to find out just how bad things are. Joblessness in Germany, Europe's largest economy, rose in March for the third month in a row and the country's six leading economic institutes slashed their growth forecast from 2.7% to 2.1%. Meanwhile, French factories produced fewer goods in January than at any time in the previous four months, while Italian business confidence has fallen.
Even European consumers are showing signs of strain. Fearful that the looming slowdown could cost them their jobs, they are delaying purchases of durable goods. The Organization for Economic Cooperation & Development predicts the euro zone will be hard-pressed to reach growth of 2.7% this year, well below the 3.1% it forecast in November. Not surprisingly, finance ministers, business execs, and economists are lining up to demand a 50-basis-point rate cut.
The ECB ignored all the evidence. Instead it argued that it needed to keep rates where they are to fight inflation. This is absurd. With economies around the world falling, inflation is not a serious worry. Last year's oil price rise, which pushed inflation higher, will not be repeated.
The ECB's inaction on rates could well spark a new euro crisis. Within minutes of the governing council decision, the euro was under attack in the currency markets. If it falls much further the ECB could be forced to intervene in an attempt to buoy it--a costly procedure that is unlikely to work unless it changes its monetary stance. The ECB is the only major central bank not to have cut rates this year. At its next meeting on Apr. 26, the ECB must finally do so and by a minimum of 50 basis points. Otherwise it will do severe harm to all euro zone economies.