For Mario Draghi the last cut could be the deepest. Unlike the Federal Reserve and the Bank of England, the European Central Bank is perceived to still have room left with traditional measures to reduce the cost of borrowing. With Europe in recession and central bank forecasting gloom until the second half of this year, one might think the ECB should be reaching for the rate lever. Probably not today.
The central bank likes to move its trio of emergency lending, benchmark and deposit rates nice and neatly, all at the same time. If it now takes the benchmark below the current 0.75 percent that would mean the deposit rate (which it pays banks to park cash with them) would go into minus territory — terra incognita indeed for the Frankfurters.
As there are a host of potential downsides to running a negative deposit rate, from shuttering money market funds to the sheer ineffectiveness of such a move, the ECB may stick to the old central bank adage that advises untested tools to be used timidly.
As it happens, fortune may favour the not-so-brave. Business confidence indicators from France, Germany and Italy all rose in the past month, suggesting managers see better times ahead. If the forecast improvement turns up in time, Draghi could be spared from having to make the most awkward of interest rate adjustments. It could be worth just hanging on a while longer.