HOT: ECB Cuts Rate to Record Low, Deposit Rates at Zero

The European Central Bank, joins China and the Bank of England in moves to ease credit.

From Bloomberg,

The European Central Bank cut interest rates to a record low and said it won’t pay anything on overnight deposits as the sovereign debt crisis threatens to drive the euro region into recession.

Policy makers meeting in Frankfurt today lowered the ECB’s main refinancing rate to 0.75 percent from 1 percent, as predicted by 49 of 64 economists in a Bloomberg News survey. The ECB also cut its deposit rate to zero from 0.25 percent and its marginal lending rate to 1.5 percent from 1.75 percent. President Mario Draghi holds a press conference at 2:30 p.m. in Frankfurt to explain the decision.

With Europe’s debt crisis curbing growth across the continent and damping the global outlook, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction. While today’s moves may not stimulate demand, they will lower borrowing costs for struggling banks and could build on the confidence boost euro-area governments delivered last week when they took steps toward a deeper economic union.

Looks very much like a synchronized move.

Still, the doctrine of the euthanasia of the rentier that wages war against interest rates have become so incredibly prominent

Here is the premise for such action, from the same article…

A deposit rate of zero may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion euros ($1 trillion) is currently being deposited with the ECB each day.

The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. Today’s move may therefore lower the euro overnight index average, or Eonia, which stood at 0.33 percent yesterday.

This is really crazy stuff.

Debt has been the core symptom of the current crisis yet debt is still seen as the solution.

So there is hardly any meaningful reforms in the direction to allow markets to clear by transferring resources held by unproductive entities to the productive sectors at large price markdowns. Of course this means bankruptcy for both insolvent governments and banks, which is why political authorities have been doing the same things over and over again and expecting different, hopefully positive (wishful thinking) results.

Again as the great Professor Ludwig von MIses warned,

Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy.

The reality is that all these have been meant to shore up the cartelized debt based political system that has operated around the triumvirate: privileged bankers, the central bank and the welfare governments.

For these political and quasi political agents losing entitlements is non-negotiable…until forced upon by economic reality.

Kick the can policies has only been worsening the problem.