The article being discussed is titled ‘ECB Reopens Door to Fresh Rate Cuts’ which appeared in The Wall Street Journal on March 18, 2016. The article reviews latest comments by ECB chief economist on the possibility of ECB cutting rates even further into negative territory and what impact the move might have on global markets.
About two weeks back, ECB President Mario Draghi had mentioned that ECB might not cut rates any further. This had caused Euro to rise significantly against the US Dollar. This latest statement by the chief economist of ECB has been described as a balancing statement to the earlier statement made by President Draghi (Fairless and Buell).
The article quotes the chief economist as saying that ECB still has rate cuts in its armoury and the option is not fully exhausted. As a result of this latest statement, Euro had come down against US Dollar (Fairless and Buell).
The article mentions that ECB and other central banks throughout the world have been trying to weaken their currencies through rate cuts in the last year and a half. Rate cuts result in depreciation of currencies, thus benefitting exports. However, if everyone indulges in the same strategy, it will be counter balancing (Fairless and Buell).
In my opinion, the article makes some valid arguments regarding use and overuse of rate cuts as a monetary policy tool to devalue currency. This may result in currency war with nations that are heavily dependent on exports, over using this tool.
The need of the hour is for central banks to devise new innovative policy tools suited to their particular needs, so that the effectiveness of central bank actions is fully played out in the global markets.
Work Cited
Fairless, Tom and Buell, Todd. ECB Reopens Door to Fresh Rate Cuts. The Wall Street Journal. Web. 18 Mar. 2016. <http://www.wsj.com/articles/ecbs-praet-says-further-rate-reduction-remains-a-possibility-1458295050>.
