A wake-up call from the ECB

The European Central Bank (ECB) has cut the base interest rate for the economies of the Eurozone to zero percent. Inter-bank lending rates across Europe will now be at 0.00 percent instead of 0.05 percent. This record-low interest rate is intended to stimulate liquidity and, coupled with expanded quantitative easing, jump-start the moribund regional economy.

Bringing down the base rate to zero percent is effectively the central bank’s admission that it is running out of options and a testament to the limited role of interest rates in aiding the struggling economy. The central bank can stake its credibility in the process and bring about instability in the financial sector.

Nevertheless, the ECB took this extreme step regardless of risk because it feared deflation could pose a much bigger danger to the regional economy than otherwise. Inflation in the Eurozone, with 17 member nations, is estimated to grow 0.1 percent at best this year.

The ECB also decided to additionally slash the negative deposit rate the central bank charges banks for parking money, from minus-0.30 percent to minus-0.40 percent. In its bond-purchase program, it will also include investment-grade corporate bonds so that the benefits could become more direct for companies and households. In short, the bank was pulling all the stops and further widening the spectrum in the monetary zone.

The move by the ECB could stall - and even reverse - the monetary tightening campaign in the United States, and financial markets worldwide could temporarily enter stable waters thanks to the boost to the world economy.

But the goal of the ECB’s is obvious. It is well aware that if Europe’s economies fall into a deflationary dip like the one Japan has experienced over the past two decades, any endeavor or spending would be for naught.

The government, the legislature and Bank of Korea must not take lightly this message by the ECB. The central government must liberate Korea’s businesses from their tenacious regulatory shackles to encourage them to invest freely following structural reform; the National Assembly then should expedite the passage of the service industry development act and labor-related reform bills.

The central bank must also venture away from the traditional monetary policy of stabilizing prices and do what it can to prop up demand.

JoongAng Ilbo, Mar. 12, Page 30