Even before the European Central Bank (ECB) announces whether it will cut interest rates later this week, alarm bells are being sounded.
It is widely expected that the bank will cut rates as part of a wider package to stimulate the economy, along with a pledge to keep them low for longer. It is a long-rumoured move to counter a weak manufacturing sector, the uncertainty surrounding Brexit and the ongoing global trade war.
However, a rate cut would create a chasm within society, according to Christian Sewing, the head of Deutsche Bank, who said it would benefit those with assets while further burdening savers. He was backed up by Martin Zielke, chief executive of Commerzbank, who said it was neither sustainable nor responsible.
While it has yet to be confirmed what will be coming this week, the cut in rates has long been expected and is likely to be part of a package of measures announced by the ECB in Frankfurt to support the eurozone.
Rates have been held near zero in recent years in an attempt to stimulate growth, but the bank had intended to start raising them gradually. However, the ECB now expects that they will stay at the current levels or lower until next year.
Behind this more cautious view is a weakening outlook for parts of the eurozone economy, with Mario Draghi, the ECB president, saying in July that the outlook was becoming progressively worse for sectors such as manufacturing.
Last Friday, it emerged that German industrial output unexpectedly fell in July, adding to signs that struggling manufacturers could tip Europe’s biggest economy into a recession in the third quarter, and supporting the case for the ECB to take action.
Germany’s industrial output fell by 0.6% on the month, bucking expectations for a rise of 0.3%. The drop was driven by a decline in the production of capital goods.
Economists generally define a technical recession as at least two consecutive quarters of contraction, and the German economy shrank by 0.1% in the second quarter.
Germany’s export-reliant economy is suffering from slower global growth and business uncertainty caused by President Donald Trump’s “America first” trade policies and Britain’s planned, but delayed, exit from the European Union.
Chancellor Angela Merkel said at the start of a visit to Beijing that the China-US trade war was affecting the whole world and that she hoped it would be resolved soon. But the reaction from the two German lenders, Deutsche Bank and Commerzbank, demonstrates that not everybody would be happy with more monetary stimulus in the eurozone, with opponents claiming it would have little effect on the economy.
“Few economists, at least, believe that cheaper money on this level will do anything,” said Sewing. “This fits in with what we get from listening to our customers. Medium-sized companies tell me clearly: they will not invest more just because the loan will be 10 basis points cheaper.”
Commentators have also queried the move. Moritz Sterzinger at risk advisers JCRA said the effects of interest rate cuts as a way to stimulate the economy were contested. “After more than four years of negative rates and not much to show for it in growth, the adage that cutting interest rates is ‘like pushing on a string’ rings very true. Research from the University of Bath contends that negative interest rates have reduced bank lending rather than encouraged it,” he said.
All eyes will be on Frankfurt on Thursday to see if the ECB carries through on the rumours.