With i ECB rate cuts coming and a Fed waiting for better times to ease monetary policy, the divergence between the two main central banks is taken for granted. With inevitable financial consequences, according to some experts.
If, in fact, the decrease in the cost of money in the Eurozone is highly anticipated given the record level of rates at 4.5% which is holding back mortgages, loans and investments, it would be a mistake for analysts not to also evaluate possible negative impacts resulting from a reduction in the cost of financing in a context of high US interest rates. In the foreground is the euro and the real possibility that it will weaken in the face of a strong dollar.
This aspect was underlined by Daniel Lacalle, chief economist of Tressis Gestion. Why is the community currency at risk of being hit by the ECB? The effect of rate cuts on the currency can destabilize the Eurozone.
ECB rate cut coming soon, but beware of this negative effect
The prospect of the ECB diverging from the Federal Reserve on interest rate cuts is likely “particularly negative” for the 20 eurozone countries. This is supported by the expert Daniel Lacalle on CNBC, with this reflection:
“The rate cut problem at this moment it is that the ECB takes it for granted strength of the euro. And if they start cutting rates before the Federal Reserve, that essentially gives the world a signal that the euro has to weaken. And if the euro weakens, the account of Eurozone imports will increase, making Eurozone growth even more difficult”.
Lacalle said a rate cut in June would not push German, French or Spanish businesses to take out more credit “because a small rate cut is not the driver of credit demand”. Credit demand refers to the appetite for business and consumer loans.
He added: “What makes the demand for credit attractive, or increasing, is the fact that [ci sono] economic and investment opportunities and these are held back by regulation and energy policy wrong of the euro area”.
A downward push for the euro driven by the divergent Fed-ECB policy could therefore bring further shocks of instability. If the community currency depreciates, the cost of imports may generally increase – and damage companies that import – but facilitate exports. Finally, pay attention also to the correct evaluation of the relationship between high rates and growth in the Eurozone.
Lacalle of Tressis Gestion said one of the prevailing theories in the market is that high interest rates in Europe are responsible for the slow economic recovery. “However, the eurozone slowdown has absolutely nothing to do with rate hikes”he has declared.
Lacalle instead stressed that recent economic weakness across the eurozone should be attributed to the bloc’s energy policy, regulatory measures and agricultural policy.
In summary, the expected ECB rate cut coming soon – probably – in June it may not be the panacea for all the Eurozone’s ills.
