Thursday, May 8, 2014

ECB May Swing in France's Direction

Mario Draghi hinted that the ECB will lower its main rate in June, acceding to increasingly insistent demands from France that the bank do something to decrease the value of the euro and raise the inflation rate. It's about time.


FrédéricLN said...

Hi Art, now that I'm fully conscious of your skills as a mathematician and macroeconomist, I really need help. How is it that lowering interest rates would combat deflation? It's usually aimed to combat inflation ("des taux bas sont le meilleur remède contre une inflation importante", according to this financial communication website ).

I'm quite in the opposite situation of yours — you explain that the 2008 crisis refreshed your knowledge of economics, and I have the feeling to understand macro economics even less than when I used to learn it :-(

(That may be the hidden reason why I focus on micro-economics these years!).

Art Goldhammer said...

Raising interest rates combats inflation. Reducing rates is supposed to increase demand, hence prices.

FrédéricLN said...

Yes thank you. Quite simple indeed :-( !

And actually in France we state that the low interest rates fostered a rise in solvent demand for real estate, therefore a rise in real estate prices (which are still at their pre-2008 levels). It did actually not push GDP, as reluctance of municipalities against new building new housing block the construction industry; so the phenomenon may rather have reduced "le reste à vivre", the solvent demand for ordinary goods (those you don't borrow for). But the basic mechanism is the one you explain.

So I understand better the Maastricht criteria.

So far I understood them (criteria 1 and 4) as 1. low inflation, 4. low interest rates;

but it's rather 1. low inflation; 4. despite interest rates which should not be much higher than in other countries with low inflation (convergence of interest rates, ).

Which might probably be understood as: "sustainably low inflation".

bernard said...

given the present level of interest rates, the difference in stimulus will be negligible of course. What would matter for France is if inflation would increase a bit -little chance-, thus decreasing real interest rates and indeed and more importantly and likely, if the exchange rate fell, which it likely will if the ECB says it wants it to.

FrédéricLN said...

Negative interest rates would be a powerful sign: the recognition, by the central monetary authority, that present money has lower value that future money is expected to have. The lender would pay the borrower to keep his money, to give 99% of the amount the chance to be still here next year. Why not?

FrédéricLN said...

… lower value than… (and my usual apologies for my expression in English).