When news on the ECB policy decision broke yesterday, the New York Times reported on “negative interest rates”, while the German Frankfurter Allgemeine reported the introduction of “penalty interest rates.” The Spanish El Pais focused on the 400 billion Euro injection to reactivate credit. The Spanish and German reactions give insights into the different interests of both economies, but also the general divergence that still rules across the Eurozone. The interest rate decision is part of a careful policy path by the ECB to avoid deflation, while at the same time keeping within the legal and political constraints, where the latter are mostly given by German interests.
The question is whether this will be enough to avoid deflation, without having to go to quantitative easing, as done by the Fed and the Bank of England. And the question remains whether the banking system is healthy enough to transmit this looser monetary policy, especially in those countries most in need of credit recovery. Unfortunately, we will not find out the answer to this question until after the summer.