Detrimental increment

ECB sticks to caution with minimum rate cut

The European Central Bank can't please them all. Whatever the bank did to interest rates on May 2 was bound to be criticised. Even the widely expected minimal cut of 25 basis points, to 0.5 per cent, would look like too little for some and too much for others. More surprising is that the debate is running through the ECB itself. The bank's governing council was split on whether a cut was justified, which suggests that the institution is too divided to take the decisions that a sinking euro zone economy needs.

To be fair to Mario Draghi, the ECB president, the rate cut wasn't the only thing announced on Thursday. The ECB will support the euro zone's financial system by keeping its unlimited, fixed-rate liquidity lines open until July, 2014. It is trying to help the development of a market of asset-backed securities based on loans to small and mid-size companies. Finally, Draghi says he is technically ready, if necessity arises, to encourage lending by charging banks a fee - a "negative interest rate" - for the deposits they keep at the ECB.

Such measures may explain Draghi's insistence that the current monetary policy has been, and remains, "extraordinarily accommodative".

Monetary hawks may think it is. In the real world, other major central banks have long been much more aggressive in fighting the widespread economic malaise.

Draghi hides behind the ECB's mandate of a medium-term euro zone inflation rate "below but close to 2 per cent". Inflation is down to 1.2 per cent, nowhere near "close". If anything, the mandate points to a resolutely inflationary policy.

The silver lining in the ECB's divided decision is that some members of the governing council seem to have wished for a bigger, 50 basis-point cut. Yet they are a long way from winning the day. The ECB's council wants to wait in hope that things will get better. On this issue, 19 million Europeans without a job are likely to disagree with the 23 central bankers who chose caution over action.