Three reasons why an ECB rate cut will have little impact

The European Central Bank is widely expected to cut interest rates tomorrow by a quarter-percent, but should it cut?

Amid claims that more needs to be done to stimulate economies across the Euro zone, a rate reduction will likely have very little real impact, here’s why:

1. Banks do not trust one another. As a result, they are being forced to pay a premium to lend to one another which is one of the reasons a rate cut will not be translated into lower borrowing costs on new lending.

2. Government is grabbing what it can. Despite interest rates falling to a record low in 2012, savings on mortgage repayments have been eaten up elsewhere. For example, higher taxes and lower tax exempt thresholds are devouring money that would otherwise be entering the wider economy.

3. Mortgage rates are going up regardless. It is just a week since several mortgage lenders announced significant rate increases for existing mortgage customers. So whatever the ECB agrees, its impact has already been neutralised.

Short of the ECB actually mailing out cheques directly to citizens, their monetary actions continue to be muted by a web of commercial banks and Governments hovering up what money they can before it actually reaches the wider public. A significant fall in unemployment and a meaningful rise in wages are the only real measures that will have direct impact on the wider EU economies.