Sniffing out an ECB rate cut

Is the ECB "the dog that didn't bark"?

Eurowatch, by BBC's economics reporter Jonty Bloom.

This week we go back to one of my favourite Sherlock Holmes stories, The dog that didn't bark. In which our famous sleuth discovered the name of an intruder by noting what the household dog did or rather didn't do in the night. Nothing. Because it didn't bark he know that the intruder was known by the dog.

The ECB last decided not to cut interest rates in the eurozone from 4.75%. That's despite the fact that America's Federal Reserve has cut interest rates three times this year and the Bank of Tokyo has cut rates to zero. The rationale for a cut in eurozone rates seemed clear, the danger of the world slipping into recession or even depression was too high and the ECB should act. But the ECB stayed quiet and did not bark. There seem to me to be three main reasons for this.

Firstly, it is only another two weeks until the ECB meets again to decide on interest rates and a fortnight is neither here nor there in macro economics. Therefore the ECB, without doing any real damage, looks solid and austere in the battle against inflation for a little bit longer.

However that wouldn't have held back the European Central Bank from cutting rates if it had really thought the world was plunging into recession and dragging Europe with it.

The second reason is therefore that the ECB doesn't believe all the hype. America is slowing down dramatically, its economy may slip into recession but this is not a rerun of 1929. The eurozone does relatively little business with the States and as yet there are few signs it is importing the USA's problems. Why waste a cut in interest rates until you see some firm evidence that it is really necessary?

And the third and final reason is to do with internal factors. Germany¿s economy is the largest in Europe and the most exposed to external factors but although business confidence there has taken a blow and growth has slowed it is not in anything like the panic that seems to be gripping the USA at the moment. France and several other eurozone countries are doing a lot better and don't really need a cut in rates. Ireland could well do with higher rates.

So all in all it is hardly a surprise that the dog didn't bark. It recognised what was going on and decided it was safe to go back to sleep for another two weeks or so.