In recent days, although we were still far from June, in domestic and international media, script reports are “crazy” as to whether the ECB will start reducing interest rates from April or June. If there will be four, as Mr Stournaras predicted, or three, as other colleagues in the ECB’s Board of Directors predict. Whether to start the interest rate reduction from the Fed or the ECB… and so on. Does that matter that much? First and foremost, the question of when interest rates will be reduced rather than the ‘if’ one thing clearly indicates that ‘pressure’ on economies and markets in Europe by high interest rates has increased greatly and has hit ‘red’. A look at the growth rates of the Eurozone economies and the constant negative revisions of the relevant forecasts for 2024, clears the landscape. With interest rates at present levels, i.e. between 4% and 4.5% the economies of the Eurozone can no longer afford it. They cannot afford either the level of refinancing of their debt or the refinancing of investment expenditure and programmes of both budgets and refinancing in the banking system. With inflation – the way it is measured by the ECB and Eurostat – falling to levels that consistently reach 2%, it could be said that it is incomprehensible why central bankers delay interest rate cuts and prolong the financial asphyxiation of the Eurozone. The first answer – regardless of the allegations of waiting for the stability of the deflator trend – is one and has to do with the dollar. It’s about the dollar and Fed’s delay in reducing its interest rates to 5% – 5.5%. But the Fed is not in a hurry, because inflation in the US does not last show a willingness to further decrease, its economy financed by the monstrous deficit and debt does not seem to care about interest rates and especially because with interest rates at this level the US continues to attract huge volumes of capital that absorb as “hot bagels” the continued issue of debt from the Government, in the face of elections. In other words, with the Biden government seeing nothing else in front of it outside the November election and with a lasting financial financing of the economy that leaves the margin to the Fed to hold things back somewhat by maintaining interest rates in today’s heights, American interest rates have no reason to reduce directly. With this data, the ECB is in the grips, on the one hand, of the economic slowdown of the economy in Europe and, on the other hand, of Fed’s ‘no rush’ to lower its own interest rates. Because any move by the ECB that does not follow a previous Fed equivalent would lead to a slip of the exchange rate of the euro against the dollar, which is currently hardly held at $1.08 – $1.09. Can the Eurozone still face the energy crisis, or other imports of products invoiced to the American currency, with the dollar more expensive? Of course, it’s the worst thing that could happen to her under the circumstances. What can the ECB do about this? Probably nothing more than waiting for the Fed. Waiting and wishing that it will not happen in the meantime “accidents” resulting from the suffocation it already causes in the Eurozone, with interest rates at current levels. Because whatever the “gentlemen” in Frankfurt say about the ECB’s “independence” by the Fed, the truth is once again recorded in black letters: the Euro is still dependent on the dollar and the ECB on the decisions of the Fed…
Questions and rather ‘easy’ answers to the ECB’s interest rates and the euro’s ‘dependence’ on the dollar
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