Mario Draghi: to do or not to do

The question of the day is: will Mario Draghi, the new Italian chairman of the ECB, in his ‘maiden flight’ lower the European interest rate (i.e. refi rate: 1.500%) to polish out the supposed mistake of his predecessor Jean-Claude Trichet to increase it twice this year?

Now that even the economies of the strongest Euro-countries, like Germany and The Netherlands, seem to stall, amidst the total chaos in the Euro-zone, it would be a good opportunity to do so.

 

But there are some disadvantages:

·     Draghi might want to act as little 'Italian' as possible to maintain confidence in the ECB, as an institute that fights inflation primarily. Lowering the interest rate would immediately fire up speculations that he wants to loosen the reins of the ECB towards a more ‘Southern European’ monetary policy.

·     Lowering the refi-rate will probably do nothing about the extreme interest rates of (especially) Greece and to a lesser degree Italy and Spain that are set by the financial markets. Therefore this could be an unloaded gun, instead of a bazooka.

·     The lack of trust in eachother and towards their customers among the European and American banks, is not taken away by a lower refi-rate. And once the interest rate is 0%, there is nowhere to go again.

·     Jean-Claude Trichet could see it as an insult to his policy that three days after he leaves the ECB, the interest would already be lowered by 0.25% or even 0.50%.

·     Again lowering the interest would mean a disaster for the pension funds in various Euro-countries, that already have a very hard time meeting their coverage ratios, as these are often based on the official interest rates.

·     Banks in The Netherlands and probably in other countries too are currently offering savers higher interest rates (almost 3% in The Netherlands) to restore the savers confidence. Lowering the interest rates again on these savings accounts would diminish the hard-earned confidence of these savers.

My take is that Mario Draghi will keep the interest rate ‘as is’ at 1.500% and that he will speak words as ‘increased vigilance’ to point to an interest raise in the coming months (f.i. December).

Update (14.00 hr)

I've been caught being too late, without knowing it. I posted this article áfter the announcement of the ECB had been made to lower the refi-rate. That means being wrong twice.
Sorry; can happen. The only excuses I had was that very little analysts reckoned with a direct lowering of the refi-rate. But being wrong with everybody doesn't make me less wrong.