But are we really sure that we need another reduction in interest rates? Draghi said on Monday that he will not hesitate to use all the tools at his disposal to pursue the goal of bringing inflation back to 2 percent. And analysts predict that there will be a further reduction in rates: as reported by the Wall Street Journal, investors believe that the ECB will reduce rates between 0,2 and 0,5 with a probability of 86%.
Persistently low and further decreasing rates are certainly not beneficial for banks' income statements, on which market sentiment is not already favorable due to lower-than-expected growth and the fear that the new capital requirements will require payments from shareholders . Of course, Draghi is right when he says that the best way to support bank profitability is "to make sure that the economy as a whole returns to sustainable development, with stable prices". Except that for now we haven't returned to development yet...and the prospects for the next 12-18 months don't look rosy.
At the same time, the doubt remains that we are in a liquidity trap: the increases in the money supply do not affect the demand for goods and services: the yield on securities is so low that it is better to keep liquid money than to take risks market. Nor can it be excluded that if holding liquidity with the ECB becomes a "non-transitory" cost, a further reduction in the ECB rate will produce an increase - or in any case no reduction - in the rate on loans to customers. And the effect of expansionary monetary policy on inflation has been nil: it still doesn't move. Indeed, for an orthodox quantitativeist, if the increase in the demand for money is more than proportional to the increase in supply, prices will fall. And the lower rates on securities are, the more prices have to go down or (for a slightly less orthodox quantist) they are very unlikely to go up. And the fact that the interest rate curve gives very little pressure on the long term suggests that a recovery in inflation is not expected. To change inflation expectations, nominal rates would have to rise, our orthodox quantist would preach: investors would start investing in securities and liquidity would shrink. This is also a recipe which, however, has contraindications: an increase in interest rates would produce losses on the securities portfolio of banks and stock market operators – who have been wallowing in liquidity in recent months – would not be so happy…
You don't have to be a Keynesian to say that you need fiscal policy. But this is burdened by debt and caged by the fiscal compact. European governments with courage and vision would set aside their obsession with primary surpluses and start discussing public debt restructuring, on which there are already some proposals from economists. But, as Manzoni said, if one doesn't have courage (and, one might add, vision as well), one cannot give it to oneself.
