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!
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