With a new sheriff in town, the ECB is surprisingly cutting interest rates to 1.25% from 1.5%. While their sole mandate is inflation and the euro zone CPI is running 3%, Draghi is obviously betting on a fall in that inflation rate on the Phillips curve belief that lower growth will eventually lead to lower inflation. The 1970′s turned that theory on its head but some still have faith, including the Federal Reserve. In terms of impact, the move is more symbolic than anything as moving rates from 1.5% to 1.25% isn’t going to move the needle for a region that is suffering from structural economic stagnation and too much debt. Psychologically though, markets love it just as it loves every easing move by the Fed. Cheap money! Party on!

Category: MacroNotes

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3 Responses to “Draghi says lets get this party started now”

  1. theexpertisin says:

    Let’s see how long until Party on becomes Party over.

  2. toba says:

    Ahh…cheap money. Savior of all that is good and fine and decent in the world. Just keep drinking markets and the hangover will go away…

  3. toba says:

    Just as an aside for Mr. Boockvar, I agree that it is not low economic growth that reduces inflation. Contraction in the supply of credit does…and that is what are we seeing in Europe right now. This rate cut is an attempt to fight it but it’s probably too late. A severe credit crunch, if it happens, will make everyone quickly forget inflation as a problem.