The three reasons that make the ECB’s interest rate reduction a one-way street and lead to the euro being underestimated

If you follow the statements made by the ECB Council in the last two weeks, you will be relieved of any doubt about what the ECB will do with interest rates. Their reduction is absolutely certain and now it is beginning to seem even where these reductions will stop. Last on this list of ECB Council members was chief economist Philip Lane – the one who led the analysis of the temporary inflation – and said the ECB should reduce interest rates to a level that is not restrictive for the eurozone in 2025. That is to reduce them to a level that will neither support (inflationaryly) the economy, nor compress it negatively. In other words, something like what we call a ‘neutral interest rate’ and which the ECB Council member Mario Senteno identifies there about 2%. Which means that the ECB wants to lower the basic interest rate about 1.25% – 1.50% from today’s levels. The reasons for this decision are so far “clear” three. The first has to do with the fact that after the now certain new phase of the energy crisis with reference points for industrial central Europe, the eurozone economy is plunged by almost stagnation, into normal recession. And in political crisis situations that make governments powerless to act positively towards it. The rapid evolution of this “tension” is recorded in the speed and range of capital flight from the Eurozone. The second reason concerns the ECB’s main concern that Mrs Lagarde spoke about recently and which is none other than the ability of the public and private sectors to continue serving the enlarged debt at present interest rates. He spoke of the risk of a new debt crisis and the need for a fiscal and monetary halt to that risk. As is known in the first part, the budget has been put into effect from 1/1/2025 the updated Stability Pact of which all the “changes” have to do with the collection of resources to serve debt by the Member States. The problem here has become even bigger because this ‘targeting’ is in full conflict with the commitment to increase equipment costs at the same time. As for the second part, a new instrument for market intervention has been set up to support European bonds, but the TPI of which is a condition of activation is discipline in the Stability Pact… The ECB is therefore preparing to reduce lending costs in order to support the ability of Member States to address the increased cost of refinancing their debt. This problem, of course, is clearly of great concern to the ECB because any turbulence at this point strikes the stability of the financial system and the fragile and non-banks directly at heart… The third reason is that the ECB considers that this strong trend of slowing down the economy in the Eurozone and the emerging reduction in employment, especially from the industry sector, will function in relation to any increase in inflationary pressures. And they are basically referring to inflationary pressures mainly from imports and especially from energy products whose natural gas prices have again skyrocketed just before winter. With this data and with the open window for a double interest rate reduction (i.e. even 0.5%) on December 12th, the luck of the euro seems set for… landing at levels far below the $1.04 currently found. Of course, financial markets, with around $600 trillion in derivative contracts, of which the majority are interest rates, can speed up this “fall” much faster than the plans of the Central Banks managing the issuance of the currencies can control. And much more so when this happens in an environment of waiting for power in Washington by the Trump staff led by the economy, a ‘strain’ of the Hedge Funds market. In any case, what one can say is that the next few months will be a difficult period of decision for the current administration of the ECB, which will be called upon to respond by actions that do not raise “mistakes” type 2021-2022. But it will be even more difficult for economies with excessive debts, public and private sectors, which will not be able to rely on fixed interest rates and exchange rates.