As the Brexit initial turmoil abates little by little, the ECB has no immediate reason for acting. Its room for manoeuvre already seems extremely tight. Running negative rates allows a most limited scope for driving down the money price. The Euro slide provides on its own enough impetus to the economy. The case for further loosening lacks of enough ground. The wait-and-see stance by the Federal Reserve suffices to shore up the ailing pound.
Right now, the biggest challenge facing the European Central bank comes from the Italian banking disarray, a serious concern where rates can hardly provide a helping hand. Emergency liquidity could only make matters worse by leading the markets to discount a more acute ravagement than the one hitting the financial system in that country. When solvency is at stake, refraining from moving seems the best option.
As uncertainty continues its free ride, we are bound to witness a prolonged period of negative or close to zero rates. Such a highly accommodative surrounding lifts all pressure on governments around Europe for implementing reforms and coping with the huge debt pile-up. Growth holds the key to overcoming the current shortcomings. While monetary loosening has played an essential role in keeping afloat the economy during the storm, it fails to imbue recovery with enough vigour for anchoring a virtuous circle. In the absence of more jobs and increased productivity, the prospects of accelerating the low-key expansion rate seem rather grim. Thus, maintaining short-term interest at such low levels, for far too long, might backfire, financial instability standing as the most prominent collateral casualty. The sooner the monetary policy recovers normal conditions, the better.
