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Jean-Claude Trichet, President of the European Central Bank (ECB). (KAI PFAFFENBACH/REUTERS)
Jean-Claude Trichet, President of the European Central Bank (ECB). (KAI PFAFFENBACH/REUTERS)

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Time is now for the ECB to cut its interest rate Add to ...

The European Central Bank must cut interest rates this week. Merely pausing on planned rate hikes is an insufficient response to renewed economic weakness in the euro zone. The ECB should take rates from 1.5 per cent to 1 per cent – or lower.

The world economy is again struggling for growth and nowhere is worse than the euro zone. Its core members risk recession, while others face intractable crises caused by excess debt and deficits. Yet the ECB went out on a limb from other developed-country central banks and started putting rates up in April. That big and embarrassing mistake must be reversed immediately.

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Growth has fallen, and risks sinking. German GDP growth was strong in the first quarter but dropped to just 0.1 per cent in the second. The danger of recession is blatant, too, in France, whose economy stalled in the second quarter. In Greece, Portugal, Spain and Italy, fiscal cuts make recession either certain or probable. The entire zone risks a recession that will worsen national crises and weigh further on the global economy.

Monetary policy can help – and without resort to the unorthodox. The ECB’s recent mistake creates an opportunity. A meaningful cut to 1 per cent would still leave room to do more. Britain has gone down to 0.5 per cent, the United States to zero. Ultra-low interest rates are evidently not panaceas, but reducing debt service costs can make a difference.

The ECB’s case for raising rates was never compelling. Inflation was pushed higher by soaring commodity prices. But an excessively strong euro helped contain inflation to a peak of 2.8 per cent. Euro zone inflation is now 2.5 per cent. Home-grown inflationary pressure remains absent: ignore volatile energy prices and inflation in Germany is just 1.5 per cent.

The euro zone continues to depend too much on the United States and Asia to put fuel in its motor. That persistent weakness is troubling. The euro project was supposed to address it. Instead it has generated fiscal crisis and uncompetitiveness in periphery economies. The ECB can’t do much about all that. But it can get interest rates down – and must.

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