Guntram Wolff: "ECB should cut interest rates"

By Guntram B. Wolff on 3rd April 2013

Guntram, we have seen disappointing data on the eurozone economy this week, yet the expectation is that the European Central Bank will keep its main interest rate unchanged. Would that be a wise decision?

GW: Well, you raise a valid point there. Rates should be cut by now because the economic situation has deteriorated significantly. We've got a number of negative news on the labor market, of course on the business sentiment, but also among consumers and investors. In addition, we have seen that inflation rates have come down very significantly. The expectations for one year inflation are now well below 2%, so I think it's time to lower rates.

Shifting now to Cyprus. Do you think the European Central Bank was right to pull the plug on liquidity to Cypriot banks?

GW: Well, I think the ECB was right to pull the plug on banks that have been insolvent for quite some time in Cyprus. Indeed is not the role of the ECB to keep insolvent banks afloat with cheap liquidity, ELA money and so on. Yet I think it was a big mistake not to provide liquidity after the deal had been struck and after the restructuring of the insolvent banks in Cyprus, to the remaining of the banking system. In my view capital controls should not have been imposed and instead liquidity should have been provided to replace outflowing deposits in the remaining banks.