The euro rose against this dollar this morning after the European Central Bank (ECB)'s Ewald Nowotny told CNBC that monetary policy was limited in what it could achieve and that talk of negative rates was overblown. Earlier today the policymaker told Austria's ORF radio that the ECB "cannot create economic activity by ourselves".
Shaun Richards is unconvinced that the ECB's rate cut will reverse the poor euro outlook:
But why have interest rate cuts not worked so far? It’s a problem for their advocates because we’ve seen plenty of cuts already, and yet the Eurozone economy is shrinking rather than improving. The series of rate cuts began in the autumn of 2008, when the main official rate was 4.25 per cent. With two false starts, we have seen rate cuts totalling 3.5 per cent until yesterday. If cuts of 3.5 per cent have not worked, why will a further 0.25 per cent do the job? It will not.
If we look at why the interest rate weapon has disappointed, we can find a possible answer on the other side of the balance sheet – from borrowers. In my view, the impact of falling interest rates on savers and the overall economy has been underestimated in conventional theory.
In fact, the credit crunch has had a profound impact on human psychology. We now exhibit different behavioural patterns to before the crisis, meaning that stimulative monetary measures have lost much of their power. And this situation gets worse as we approach zero interest rates. It also means that economic models that do not allow for this change will continue to make forecasts which are different to what actually happens – hence the frequent use of the words “surprise” and “unexpected” in relation to economics and finance.
Or let me use the statement of the president of the ECB Mario Draghi at his press conference yesterday. Policy has been “extraordinarily accommodative throughout,” he said. But if we take him at his word, then why aren’t things getting better?