ECB takes a stupid stance

ECB makes big mistakes by delaying any rate cuts since to curb inflation it does not make a difference if they are at 1 or 2% that's a ridiculous approach. Since only 2 scenarios are possible even an extended deflation like Japan had for 2 decades but rather more likely is a hyperinflation later in 2009 as the printing press will speed up working double 24/7 shifts. They need to deliver a steep curve for banks to recover and at the same time force them to lend at cheap rates to the industry and consumers if anything can be done its that approach of absolute easy money. Although in case of Germany the implosion of mortgage financing is in too low rates. Germans finance the purchase of houses by paying interest rates on a fixed basis for 20-30 years and its not easy to switch to lower rates once the agreements are made since the banks refinance their lending usually by same maturity borrowing. The crucial part though is that only interests are paid and the basic capital repayment is done through a life insurance as they have tax advantages. The problem is and was that the income of those insurance policies depends very much on capital markets performance. Lower interest rates mean that the assumed generation of interest on the paid in capital will not be achieved. Leaving huge gaps for the ones who own the houses to be paid back out of their pockets. Generally those deals are calculated to the edge and insurers had to guarantee levels of interests earned which were lowered over the last years. As baby boomer generation head for retirement big trouble is ahead. Especially with demographic problems in Germany as the population is over aged in 2020 more than 50% of the population will be over 60. Hence Germany is not facing a real estate bubble but a demand implosion which may have the same result at some point.

ECB Signals Reluctance to Cut Rates Much Further, May Pause

By Gabi Thesing

Dec. 12 (Bloomberg) -- European Central Bank policy makers signaled they’re reluctant to cut the benchmark interest rate much further after three reductions to 2.5 percent since October, and may not trim borrowing costs again next month.

“We have dealt with the economy to some extent because we took an extraordinary measure,” ECB council member Yves Mersch said in Luxembourg today. His colleague Axel Weber said last night he “would like to avoid” taking the rate below 2 percent. Both questioned whether the bank will have enough new information in January to act again on rates.

The ECB has lowered borrowing costs by an unprecedented 1.75 percentage points since the global financial crisis pushed the euro region into recession. European industrial production plunged the most in 15 years in October as orders weakened and the region’s biggest companies scaled back investment, the European Union statistics office in Luxembourg said today.

Investors are betting the deepening economic slump will force the ECB to slice another 50 basis points off the benchmark rate in January, Eonia forward contracts show.

“They will be forced to go to 1 percent or lower by June,” said Juergen Michels chief euro-area economist at Citigroup Inc in London. “The rhetoric at the moment is to justify their forecasts, which are too optimistic.”