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ECB cuts rates

The European Central Bank on Thursday unexpectedly cut its benchmark interest rate by a quarter of a point to 1.25 percent, in an apparent attempt to bolster Europe’s economy amid the Greek debt crisis.

Published: 3 November 2011 13:56 CET
Updated: 3 November 2011 15:06 CET

ECB cuts rates

Photo: DPA

The decision to lower borrowing costs in the 17-member eurozone came as a surprise on the first day of the G20 summit in Cannes, France, where world leaders are discussing how to contain Europe’s sovereign debt problems.

The financial markets had expected the ECB to leave rates unchanged, but Europe’s central bankers clearly felt the Greek government’s decision this week to call a referendum on an EU bailout package for the country had pushed the eurozone to the brink of economic disaster.

The cut comes just after Italy’s Mario Draghi officially took over the helm of the ECB on Tuesday. He will have to justify the decision to pursue expansionary monetary policy at a time when inflation in the eurozone is clocking three percent – considerably over the ECB’s two-percent target.

At his first press conference after chairing a meeting of the ECB’s executive council, Draghi said the current economic outlook for the 17 countries that share the euro “is subject to particularly high uncertainty and intensified downside risks.”

Germany’s DAX stock index surged by three percent immediately after the ECB’s decision was announced.

“The surprise interest rate cut shows just how seriously the ECB is taking the possibility that the economy could worsen next year,” said Commerzbank chief economist Jörg Krämer.

The Local/DAPD/AFP/mry

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How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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