Draghi says Hello and cuts the ECB interest rate

Today, new ECB president Mario Draghi led the Governing Council of the ECB in its meeting on monetary policy decisions. It turned out to be an interest cut, as the interest rate on main refinancing operations was decreased from 1.5% to 1.25%.

The move was mainly motivated on falling inflation expectations and an expectation of dampened economic activity (with emphasis on downside risks). As such this is a move that is consistent with inflation targeting, and it appears that the ECB under Drahgi will continue the practice to let interest-rate decisions be guided by short-run developments in real economic activity, while securing that inflation expectations are held in check. Hence, immediate elevated inflation is downplayed in policymaking (HICP inflation is projected to hit 3% in October).

Let us hope that ECB under its new President can maintain the low inflation credibility it appears to enjoy despite its continued peculiar behavior in other dimensions of policy (say, fiscal policy).

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